Also by Vijay V. Vaitheeswaran

Zoom: The Global Race to Fuel the Car of the Future

(co-authored by lain Carson)

Power to the People: How the Coming Energy Revolution Will

Transform an Industry, Change Our Lives, and Maybe Even Save

the Planet

Need, Speed, and Greed

How the New Rules of Innovation Can Transform

Businesses, Propel Nations to Greatness, and Tame

the World's Most Wicked Problems

Vijay V. Vaitheeswaran

I HAP R

BU',SINE56

Copyright

NEED, SPEED, AND GREED. Copyright © 2012 by VUay V. Vaitheeswaran. All rights

reserved under International and Pan-American Copyright Conventions. By payment of

the required fees, you have been granted the nonexclusive. nontransferable right to

access and read the text of this e-book on-screen. No part of this text may be

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means, whether electronic or mechanicaL now known or hereinafter invented. without

the express written pennission of HarperCollins e-books.

EPub Editlon MARCH It> 2012 ISBN: 9780062096715

FIRST EDITION

Library of Congress Cataloging-in-Publlcation Data has been applied for.

ISBN 978-0-06-207599-4 (Hardcover)

12 13 14 15 1 6 0v/RRD 10 9 8 7 6 5 4 3 2 1

Dedication

For Michelle and Keila

Credits

Cover photograph © R-studiolShutterstock

Cover design by Jason Gabben

Contents

Dedication

Introduction

Part One: Need: Why Innovation Matters

1 : Wicked Problems, Wiki Solutions

2: Cheap and Cheerful

3: Of Stagnation and Rejuvenation

Part Two: Speed: Where Innovation Is Going

4: The Singularity and Its Discontents

5: So Long, Silo

6: Black Swan Kills Sitting Duck

Part Three: Greed: How to Win in the Age of Disruptive

Innovation

7: The Sputnik Fallacies

8: Can Dinosaurs Dance?

9: Greed for Good

Conclusion

Acknowledgments

Notes

Index

About the Author

Also by Vijay V. Vaitheeswaran

Credits

CopyIight

About the Publisher

Introduction

Welcome to the Ideas Economy

hI have worked in over sixty jobs in my life," says Trevor Rose,

an Australian tinkerer, describing a lifetime of frustration in the

workplace. "I couldn't think of a line that says 'I am this,'

because I have done a million and one tiny little things, none of

which was really a career in the way most people experience­

meaning the money was absolute rubbish."

Yet Trevor is a born innovator. He has always had bright

ideas, and he loves solving problems. He even put himself

through most of a university course in engineering and computer

science a few years ago, until the money ran dry and he had to

drop out. But employers often do not take him seriously, so he

has not had the chance to shine. After all, if you got a resume at

your firm from a prospective hire that said the candidate had

dropped out of college and had gone through dozens of jobs,

would you give him the benefit of the doubt?

A decade ago, that would have been the end of the Trevor

story. He would have remained just another bright spark whose

talents withered on the vine thanks to the elitist approach to

innovation taken by the world's corporations, governments, and

leading universities. But there is a happy ending, thanks to

today's global innovation revolution.

As Need, Speed, and Greed will show, there is a powerful

change under way in how innovation happens. This new approach

is transforming how intellectual capital connects with financial

capital. knocking down ivory towers along the way. Thanks to the

globalization and Googlization of the world economy, clever

ideas from every corner of the world now have the chance to be

taken seriously-even if they come from people without fancy

credentials. Governments, charities, and corporations alike are

increasingly turning to open and networked models of innovation,

such as the use of incentive prizes, to solve difficult problems.

An American company that has pioneered this approach is

InnoCentive, a spin-off from the pharmaceutical giant Eli Lilly.

The company has developed an Internet platform that allows

organizations grappling with thorny technical problems to post

them as challenges on its website. Because the InnoCentive site is

open to all comers, regardless of academic credentials or job title,

it attracts millions of creative people from around the world. The

one who best solves a given challenge wins a cash prize, which

can range from a few thousand dollars to millions. of dollars.

After his money troubles forced him to drop out of his college

courses, a forlorn Trevor Rose was browsing the Web one day

when he encountered InnoCentive. He stumbled across a

challenge posted by a private charitable foundation looking for a

better method to deliver banking services in the developing

world. He knew absolutely nothing about that industry, but he

was intrigued enough to work on the problem. But so did many

others around the world, including actual experts in development

issues and in finance.

Astonishingly, the Aussie outsider beat them all to the punch.

According to the officials in charge, his winning entry �proposed

a mobile software application that batch processes expected

spends and syncs those predictions up with actual expenses on a

transaction basis." Put simply, he worked out how simple

software could match up what people are likely to spend with

what they actually end up spending using their mobile phones in

banking. How did he do it? "When I read the further details, it

just started me thinking, and before I knew it, there 1 was writing

down the solution that came to mind. OK, it took a bit of

scribbling on paper and drawing diagrams and nutting things

over . . . but that's part of the process I get hooked on and why 1

love to solve problems."

He won the challenge and took home $2,000. But the modest

prize was not the only bounty on offer, explains Alpheus

Bingham, a cofounder of InnoCentive. The ability to get one's

ideas connected with organizations that can scale them up and

make a difference in the real world matters, he argues. So too

does the recognition that comes with the prize.

Trevor warms up to the idea of making a difference: "I do like

the possibility that something 1 thought of might help someone in

a country where the economy is very tough already. and perhaps

make their lives easier in some way . . . 1 hope so." But he goes

on to explain that this wasn' t the main reason he attempted the

challenge. For him, the main motivation was the chance to

overcome a lifetime of frustrated attempts at innovation. That's

why he continues to tackle other people's problems. He even won

another InnoCentive cash award recently, for figuring out a better

method for removing hair roots for a commercial client.

Trevor sums up the Ideas Economy nicely: �I like the idea of

being an InnoCentive solver because for me it's like a little

billboard that will say to those who doubted me in life that maybe

they are wrong and I am a lot cleverer than I look."

Something New Under the Sun

Innovation matters, now more than ever. With manufacturing

accounting for less than a third of economic activity in many rich

countries, knowledge-the currency of the Ideas Economy-is

now paramount. The United States and the rest of the rich world

will not be able to compete with rivals offering low�cost products

and services if we all do not learn to innovate better and faster.

But if we do so, there is every reason to think that the world may

yet embark on a postindustrial revolution, one that will put the

world economy on a much more sustainable footing for the

future.

Innovation is the key to global competitiveness, but it is not

necessarily a zero�sum game. Those wailing today about the rise

of China and the loss of America's innovation edge give you only

half the picture. Yes, our own failure to invest in infrastructure,

education, and other pillars of the innovation economy hurts our

economy-but the rise of the East need not. On the contrary,

because the well of human ingenuity is bottomless. innovation

strategies that tap into hitherto neglected intellectual capital and

connect it better with financial capital can help both rich and poor

countries prosper. This rising tide can indeed lift all boats, but

only if we make the effort to patch the holes in our vessel first.

Although the word innovation is often used to refer to new

technology, many innovations are neither new nor involve

gadgets. The self�service concept of fast food popularized by

McDonald's, for instance, involved running a restaurant in a

different way rather than making a technological breakthrough.

So innovation is not the same thing as invention. These days

much innovation happens in processes and services.

Novelty of some sort does matter, although it might involve an

existing idea from another industry or country. For example,

Edwin Drake was not the first man to drill for a natural resource;

the Chinese used that technique for centuries to mine salt. But one

inspired morning in 1859, Colonel Drake decided to try drilling

(rather than digging, as was the norm back then) for oil in

Titusville, Pennsylvania. He struck black gold, and from his

innovation the modern oil industry was born. A useful way to

think about innovation is that it's fresh thinking that creates

something valuable, whether for individuals, firms or society at

large.

According to the popular notion, innovation is something that

men wearing white coats in laboratories do. And that's the way it

used to be. Companies set up vertically integrated R&D

organizations such as AT&T's Bell Labs, and governments

fussed over innovation poliCies to help them succeed. This

approach had its successes, so many companies still spend pots of

money on corporate research and bureaucrats still obsess over

industrial policy. But this old-fashioned process is slow and

insular and unsuited to a world economy that moves at an ever­

accelerating pace.

The good news, as this book explains, is that the centrally

planned approach is giving way to more democratic models of

innovation. Clever ideas have always been everywhere, of course,

but companies and societies were often too closed to pick them

up. The nascent move to an open approach to innovation is far

more promising. An inSight from a bright spark in a research lab

in Bangalore or an avid mountain biker in Colorado now has a

decent chance of being turned into a product and brought to

market.

The generation and handling of ideas can make or break jobs,

companies, and entire national economies. "We firmly believe

that innovation, not love, makes the world go round," insists John

Dryden of the Organization for Economic Cooperation and

Development (DECO), the official think tank for rich-country

governments. Corny, perhaps, but studies do show that the most

important driver of economic growth-and with it living

standards-over recent decades is innovation. Innovative firms

and countries also tend to outperform their peers. After all,

mankind is not discovering new continents or encountering vast

deposits of new minerals.

Most innovation over the past few decades has been caused by

global economic integration and disruptive new technologies-in

other words, the breathtaking globalization and Googlization of

the planet. In the coming decades, the quest for environmental

sustainability and the need to meet the health demands of a fatter,

sicker, and older global population may prove to be the greatest

engines of innovation-and, therefore, the great economic

opportunities of our lifetimes.

The tools and rules of innovation are changing at an

unprecedented pace today. It was once the preserve of elites, but

innovation is becoming more democratic as open and networked

approaches take off. Countries and companies are rethinking the

role of incentives, as a richer world population finds motivation

in purpose and not only profit. And entrepreneurs and company

bosses alike are realizing the vital need to embrace risk taking

and fast failure in order to keep up with the accelerating pace of

global change. There even seems to be a happy confluence of

technological advances, market expansion, rising prosperity, and

a freer flow of ideas that promises to usher in a new golden age of

innovation.

But to unleash that potential, whether as an entrepreneurial

policy maker or as an aspiring employee-of�the-month, you need

to face an increasingly risky world with courage. Is your

community or country ready to be agile, keeping pace with a

world that is moving at double speed? Is your company really

open and networked, and do you know how to be a beacon for

good ideas from which your firm can extract value? And most

important, are you willing to fail, fail, fail, and fail again­

learning the right lessons qUickly and moving on to the next

experiment-until you succeed?

A Reality Check

This book challenges some widely held views about innovation,

the role of government versus business, supposed global crises,

and the future of the world economy. Among the popular notions

that we'll put to a reality check:

• Invention, intellectual property rights, and cutting­

edge technology are the key to innovation.

• The rise of China and India as innovation

powerhouses will inevitably come at the West's

expense.

• The most difficult global challenges the United States

faces today are fixing Wall Street and dealing with

terrorism.

• The best way to bring about a clean energy

transformation is to launch a well-funded,

government-run "moon shot" like the Apollo lunar

mission.

• Resource wars, be they over petroleum or fresh water,

are unavoidable.

• Global trends point to a "population bomb" that will

make sustainable development impossible.

• Free markets would solve even difficult global

problems such as climate change if only meddling

politicians kept out of the way.

• Western health firms and systems are so well financed

and technologically superior that they have nothing to

fear or learn from poor-world upstarts.

• Innovation is always good for society.

• Today's world economy is no riskier than yesterday's.

• When it comes to innovation, there's nothing new

under the sun.

In debunking these notions, the chapters that follow will build

the case for a rethink of how the world approaches innovation.

And the concluding section of the book will present a manifesto

for the coming age of democratic innovation-"The Disruptive

Dozen: The New Rules of Global Innovation."

My central argument is that thanks to ways in which

innovation is rapidly evolving. the world stands on the cusp of a

post-industrial revolution. This is a very good thing if you can

learn the new rules of innovation. This book will reveal the

principles and practices-and introduce the good gurus and go­

getters-now reshaping the world economy. The most influential

of the small handful of innovation experts who really matter is

Clayton Christensen, a soft-spoken Harvard professor with some

hard-hitting ideas. In his best-selling book The Innovator's

Dilemma, he argued that there are two different kinds of

technological invention that drive businesses. The most common

are �sustaining technologies," which lead to incremental

improvements to products and services that sustain the business

models of incumbents and preserve the status quo. Most

companies end up focusing on such incremental innovation, as

this is what pleases the existing base of customers and makes

short-term economic sense.

Far less common are �disruptive technologies," which offer

radically new ways of meeting customers' needs that do not fit

neatly into old business models and which often come from

unexpected quarters. Such breakthroughs are often shunned by

existing companies, as they see them as threats to existing,

profitable lines of business-or as not nearly good enough to

satisfy existing customers. Christensen observed such behavior

among the big technology firms that cornered the market several

decades ago with very expensive technologies for data storage;

when cheap and small disk drives first arrived, the incumbents

scoffed that this would never be good enough. In fact, the scrappy

upstarts managed to produce devices that were very affordable

and good enough for the needs of most people-induding many

who could never afford the expensive, gold-plated storage

devices.

Christensen warned that most established firms get trapped

into making better and pricier products for their best customers,

leaving them vulnerable to attack by nimble disruptive innovators

from below. That is precisely what happened to the traditional

computer firms, which made large and expensive systems for

corporate users, when microcomputers arrived: firms such as

Digital Equipment Corporation and Wang ignored gadflies such

as Apple and ultimately went bust, though IBM found a way to

survive. Kodak and Polaroid were sideswiped by the arrival of

digital photography, which they too discounted as a fringe

business. And online retailing continues to wreak havoc on those

bricks-and-mortar businesses that do not have a radical strategy

for embracing the digital disruption. Some of those dinosaurs­

such as IBM, Kodak, and Walmart-did learn how to dance to a

new tune, while many others went bust. That pOints to

Christensen's next great contribution: reflecting further on his

observations, he realized that the really disruptive force was not

the technology, but the business model embraced by the upstarts.

In his next book, The Innovator's Solution, he changed the term

of art from "disruptive technology" to "disruptive innovation."

Christensen, a strikingly tall and imposing figure, is now in his

sixties, and battles with cancer and a stroke have slowed his

speech a bit. But his mind remains as razor sharp as ever, and the

great man now has bigger game in his sights. He has been

examining the rise of various Asian economies over the past few

decades and thinks the argument about disruption applies well to

the rise of China. What about the Southeast Asian "tiger"

economies such as Taiwan and Japan, which rose much earlier?

The rise of the tigers was impressive, but they simply lack the

scale needed to pose a threat to the West. As for Japan, he argues

that it really had the chance to be disruptive but ultimately

became trapped by the innovator's dilemma. In industry after

industry, Japanese firms rose to the global lead by disrupting

comfortable incumbents in Europe and the United States. But

once they reached the technology frontier, he argues, they

themselves got captured by their own best customers into gold­

plating inventions-the classic trap he identified. The United

States got out from that trap because of its dynamic

entrepreneurial economy, which allowed uncompetitive steel and

textile mills to fail and car plants to relocate in order to redeploy

financial and human capital into newly disruptive industries such

as the Internet.

Alas, Japan's ossified corporate sector, debt-laden banking

sector, and top-heavy government policies have all prevented

such a rejuvenation. That, thinks Christensen, has exposed Japan

to disruption by an even more potent rising star, one that

possesses both the economic heft that Singapore will never have

and the entrepreneurial nimbleness that Japan lacks: China. And

coming a few years behind it, one could add, are India and Brazil.

That suggests the global economy and its comfortable incumbents

are in for a rocky ride.

That is one important reason to think the world economy is

entering a riskier period. However, this is not to say all of the

advantages of incumbency are gone. It may be no easier to disrupt

incumbent technologies or business models than in the past.

However, thanks to the democratization of innovation described

in this book, lots of new kinds of disruptive entrepreneurs from

all over the world are now able to get access to markets, capital,

and connectivity. That allows them to try out many more wild and

crazy ideas than in the past, in effect. getting many more shots on

goal, making it more likely that a genuinely disruptive force such

as mobile telephony will emerge again in the future.

Over the past few decades, globalization and Googlization

have kicked off the first phase of an innovation revolution more

profound and powerful than any economic force since the arrival

of Europeans on American shores half a millennium ago. This has

brought such advances as the World Wide Web, social

networking, 2417 connectivity, and global markets. This book

peers inside the minds of the winners and plants red flags on the

black holes they avoided so that you can raise your game.

Innovation is evolving from being a fuzzy notion to being a

proper discipline, much as the total-quality movement in

manufacturing management did a few decades ago. Drawing on

the best of the academic and field work in this emerging area, this

book will teach you the new rules that you need to know and

point to the skills you need to develop to profit from the shifting

global economic order.

Need, Speed, and Greed will describe the urgent need for new

solutions to twenty-first-century crises, profile cutting-edge

innovators as they disrupt established business models and upend

entire industries at breakneck speed, and show how greed can do

good if the broken rules of capitalism are fixed so that

entrepreneurial firms and markets are rewarded for solving

socially important problems.

Need: Why Innovation Matters

The first section of the book frames the innovation question by

looking at the big picture and argues that today's challenges mean

innovation is more important than ever. After enjoying decades of

seemingly effortless prosperity and unprecedented material

progress, we are now entering a complex and risky economic era

laden with potentially devastating global threats. This demands an

entirely new approach to innovation in response.

This section of the book picks up on the current debate

hetween the tec:hno-optimists, who :nglle thHt ::I r.onflllenc:e of

disruptive technologies make these the best of times, and the eco­

pessimists, who point to a perfect storm of demographic and

ecological forces that could lead to cataclysms ahead.

The real trends that underlie today's global challenges are

unprecedented urbanization, rapid aging, and the spectacular rise

of emerging economies and a global middle class. These forces

are mostly to be applauded, as Chapter 1 explains, for they are the

result of rising global prosperity and improving health conditions

for billions of people. The problem arises because the same trends

also add pressure to health, environmental, and other systems.

Some of these impacts are global, as seen in emerging crises

ranging from climate change to pandemic diseases. Others lead to

local troubles like resource scarcity and air pollution. The chapter

pOints the way forward on these grand global challenges.

It is not just planetary-scale problems that demand an

innovation revolution: corporate-scale problems do too.

Established companies in the developed world are today facing

disruptive threats from emerging markets that could put them out

of business altogether-and in the future, today's emerging

champions from the BRIC countries (Brazil, Russia, India, and

China) will themselves face challengers from the rising countries

of CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and

South Africa) and other acronym-bearing hot spots. Chapter 2,

which examines the trend toward frugal engineering, explains

why this poses such an existential challenge to the West's storied

multinationals. It also makes the controversial argument that this

very same trend could actually tum out to be good for ordinary

people in the very same developed economies.

The most important reason the world needs fresh thinking on

innovation is the fact that many people are being left behind by

the advance of the knowledge economy. There are signs of a

growing backlash because many even in the middle classes of

rich countries feel they do not have the tools needed to participate

in the ongoing transformation of the world economy. The elites of

Mumbai are today closer to the elites of Manhattan than they

were two decades ago, it is true, but what about Kansas? The

hard-working salarymen of the developed world are not getting

richer, are definitely getting angrier, and may well be getting

shafted by the economic elites who have mastered the new rules

of global innovation.

Even as rural women in Africa have seen their lives

transformed by mobile phones and the Internet, the middle classes

and blue-collar workers in rich countries everywhere have been

squeezed by the new global realities. As the first phase of the

innovation revolution gives way to a much more profound

transformation in the next decade, the United States and other

rich societies must find a path to inclusive growth or risk being

left behind by history.

That pOints to one of the central political and economic

questions of the age: how can the extraordinary benefits of the

innovation revolution be shared more equitably? The good news,

as Chapter 3 reveals, is that the more open, bottom-up nature of

innovation today lends itself to more widespread participation by

those without fancy doctorates or MBAs. However, many still

lack the skills and savvy to take advantage of these opportunities

the way the intrepid Trevor Rose did on InnoCentive.

Speed: Where Innovation Is Going

Humanity can tame this century's grand global challenges, but

only if it embraces the trend toward the democratization of

innovation. This will require learning new skills-and leaving old

habits and misconceptions behind. The second section of the book

describes the three powerful ways in which meta-innovation­

that is, innovation in the very ways in which we innovate-is

changing fast. If you want to succeed in this brave new world,

you must be agile, open, and willing to embrace risk.

There is a quiet but powerful confluence of technology trends

upending business that could accelerate the pace of meaningful

innovation. As Chapter 4 explains, some influential thinkers even

argue that this confluence amounts to a "singularity," which will

lead to a postbiological civilization in which the line separating

man and machine disappears over time. That seems a bit far­

fetched. Even so, the confluence of multiple technologies

advancing at an exponential pace promises to accelerate global

innovation and speed the global economy toward a postindustrial

world.

What is more, the creative process is being prised apart in

astonishing, even frightening, ways. One is the emergence of

networked and user-driven business models. Chapter 5 scrutinizes

the open-innovation movement in detail and finds that there is

much to celebrate here. However, it warns that this approach has

been overhyped and argues that there is peril as well as promise

in openness.

Another factor changing the way innovation works, explored

in Chapter 6, is the evolving nature of risk and changing attitudes

toward failure among the world's leading innovators. Simply put,

the downside of globalization and GoogUzation is that

individuals, firms, industries, and even entire economic systems

the world over are now much more interconnected. As the recent

financial meltdown revealed, that makes life riskier in ways that

many people have yet to grasp fully. Leaders can build resilience

into organizations and countries by rethinking how to trade off

benefits and risks in evaluating new policies, technologies, and

methods. At the very personal level, each of us needs to embrace

experimentation, calculated risk taking, and fast failure in our

own lives, educational tracks, and career choices.

Greed: How to Win in the Age of Disruptive Innovation

It is fashionable, in this post-Enron and post-Lehman era, to decry

the failings of rapacious capitalism. Capitalism is indeed flawed

in important ways that are making it difficult to tackle the

demographic, economic, and environmental challenges ahead.

But the final section of the book argues that to rail against

capitalism without acknowledging the power of markets, the

profit motive, or Schumpeterian �creative destruction" is to miss

the greatest opportunity to solve the world's problems.

The short-term obsessions of shareholder capitalism, for

example, have led corporations in the past to ignore the

opportunities for sustainable profitability to be had by investing

in natural assets over the long term. Because the true or life-cycle

costs of market activities, such as environmental or social costs,

are typically not reflected by market prices or government

policies, managers and entrepreneurs do not have sufficient

incentive to favor clean energy technologies, say, or prevention­

oriented medical treatments over costlier, less efficient,

unsustainable alternatives.

Despite the prevailing antimarket sentiment, greed can be

good-if, and only if, a more muscular government plays its

proper role so that the playing field of capitalism is no longer

rigged in favor of dirty industries, inefficient markets, and short­

term payouts. Market forces and profit are powerful incentives for

change, after all. Rather than wish them away or demonize them,

we need to harness them and redirect the creative energies of

entrepreneurs and corporations to take on-and profit from

solving-the world's wicked problems. *

The greatest fallacy in innovation circles is the notion that

innovation is a zero-sum game. But China's rise does not have to

come at the expense of the West, just as Japan's peaceful rise

several decades ago did not come at America's expense-despite

widespread panic and gloom-mongering at the time. Chapter 7

explains what governments should and should not do to fix

market failures, end perverse subsidies, and realign incentives in

favor of sustainable capitalism.

How should bosses and aspiring bosses at established

companies respond to the new global threats? History suggests

that many such firms will be unable to adapt to new realities and

therefore will bite the dust. But farsighted leaders and nimble

workers can transform organizations-even ones that are many

decades old and have tens of thousands of employees-if they

figure out the new rules of innovation. Chapter 8 highlights the

need for traditional industries to capitalize better on the intangible

capital within their organizations by connecting it with the

knowledge economy outside their firms.

There is a dramatic U-turn now getting under way in corporate

boardrooms, moving them away from short-termism and

dishonest accounting and toward that level playing field.

Dynamic social entrepreneurs and �phi1anthrocapitalists" are now

harnessing market forces in new ways to achieve social goals.

Chapter 9 argues that what motivates idea generators in the new

age of innovation is not mere profit: it is profit inspired by the

passionate pursuit of purpose.

That is the foundation stone of the Ideas Economy and the

path to inclusive growth, the new paradigm for sustainable

economic development in the twenty�first century. The answers

lie in the dynamic interplay of the three great forces that are

turning the world you know on its ear: need, speed. and greed.

Part One

Need: Why Innovation Matters

1

Wicked Problems, Wiki Solutions

Are these the best of times or the worst of times? On one

hand, today's grand global challenges, the consequence of

unprecedented interdependence and resource guzzling, are

daunting. But on the other hand, new ways of innovating

promise robust solutions to such problems, solutions that

may yet create the profitable industIies orthe futlJre.

The advance of technology and the spread of

globalization have helped improve the health of the world's

population in numerous ways, ranging from the spread of

HIV medicines and vaccines to the remote provision of

care via telemedicine. Unfortunately, globalization and the

march of development have also made it harder to tackle

some global problems that experts thought they had gotten

under control-such as pandemic superbugs that have the

potential to wipe out much of humanity.

Bacterial superbugs are a good example of what

economists call a tlc'1gedy of the commons. The problem

arises because a shared global resource (in this case, the

effectiveness of antibiotics) is being diminished selfishly or

unwittingly by some people to the detIiment of all­

including future genelc'1tions.

The classic problem of this sort is climate change. Most

environmental problems, be that smog in the air or

pollution in waterways, are local and reversible. In time,

as countries get Iicher and as technologies improve, these

problems are generally tackled successfully: the air in Los

Angeles and London, for example, is far cleaner than it

was in the hazy 1970s, never mind how filthy London 's was

back in Dickensian times. In contrast, carbon pollution

does not automatically reverse itself the richer a country or

region gets. Worse yet, there are irreversible triggers in

the climate system that may be crossed off in coming years,

leaving mankind unable to return to a safe climate no

matter how great the willpower or how deep the pockets of

future generations.

Getting a handle on such global public goods, which

often fall between the clc'1cks of national regulations and an

impedect system of global governance, promises to be one

of the glc'1nd challenges of this new century. This chapter

sounds the alarm bell about such scourges, examining in

partiCl1lar the threat of deadly pandemics, but it also

brings good news from the front lines of many such battles.

Bottom-up approaches, building on demOClc'1tic

technologies such as the Internet and mobile phones, offer

hope that the wOlld may yet overcome pervasive market

and government failures in dealing with such challenges.

Can you change the world by changing your underwear? That

is what Jeff Denby believes. A lanky young man with a

fashionably disheveled look and little money in his pockets, he

hardly seems like a revolutionary. But he is armed with a few

things more important than money alone in today's innovation­

driven world: passion, purpose, and a provocative idea.

While getting his MBA at the University of California at

Berkeley, he realized that there was one essential industry that

was just crying out for fresh thinking. He observed that the

underwear business, a billion-dollar enterprise, is dominated by

two types of firms: those that peddle cheap commodity briefs

(think store-brand tighty-whities) and those that market

underwear using fantasy hunks and babes (think Calvin Klein and

Victoria's Secret).

Denby and Jason Kibbey. a fellow MBA from Berkeley,

realized that there was a huge market opening. Informal polling

and their intuition suggested that many people wanted underwear

that was nicer than plain-vanilla briefs, but were nevertheless

deeply unhappy that their only high-quality choice was underwear

marketed with a frat-boy mentality. So they came up with the idea

of socially responsible underwear and founded a company called

PACT.

The firm's philosophy of ethical business starts with the

sourcing of its raw materials. Denby spent months researching the

entire supply chain for undergarments. He settled on a supplier in

Turkey who uses only cotton that is certified to be organic and

who pays workers a living wage. In addition to the product being

ethically produced, PACT also donates 10 percent of the profits

of every sale to charity. The most striking aspect of the firm's

business plan is its marketing approach. The firm sells its

products using not images of waifs but pictures of real people

(including Berkeley graduate students) with realistic bodies

wearing its stylish underwear.

The start-up's novel approach so appealed to Yves Behar, a

designer who runs a hip consultancy known as fuseproject, that he

agreed to invest in the firm and to design its products. Noting that

he has won numerous honors from design societies, the New York

Times recently raved that Behar "has helped create some of the

most memorable designs of recent years." He has worked for

firms ranging from Herman Miller to BMW to GE, but he is best

known for designing the rugged little computers distributed by

the One Laptop per Child program-a charitable effort that

distributes extremely cheap computers for use in schools in the

developing world.

Now Behar's team is coming up with a variety of novel and

ever-changing designs for PACT. He explains that by bringing

together sustainability and great design, the firm has been able to

create an entirely new reason for people to purchase and wear a

product that goes beyond traditional marketing. "Advertising," he

insists, "is the price companies pay for being unoriginal." Each

design (his firm comes up with new ones every six weeks) is

associated with a different charity that benefits from its sales. One

style of underwear benefits the green charity started by Wangari

Maathai, the Kenyan Nobel Peace Prize winner, for example,

while another supports Oceania, a nonprofit that works to

conserve marine ecosystems. Other designs support literacy

projects, endangered forests, and so heartwarmingly on.

Unlike multinational clothing giants with rigid supply chains,

the firm's nimble manufacturing platform is able to make small

batches of underwear in those unique patterns. That allows it, like

the Swiss watchmaker Swatch, to change its designs frequently.

Denby hopes that this encourages customers to change their

underwear just as frequently, improving the world a little bit as

they do so.

Sustainable underwear may seem trivial in the grander scheme

of things, but in fact the PACT story gives a glimpse into the way

that the new tools and rules of innovation promise to tackle the

world's grand problems. Globalization and Googlization are

essential enablers, of course, as Denby would not be able to

manage his foreign supply chain and market his wares globally

from California without them. However, the essence of this firm's

strategy is to persuade customers that its purpose is worth

supporting. That purpose, as demonstrated by the firm's embrace

of sustainable agriculture and its no-sweatshops policy, is the

improvement of the planet and respect for people everywhere.

People plus planet means purpose, the firm is betting, and they

hope this will translate into profits too.

Greed for Good

The rise of social entrepreneurs like Denby, a theme explored in

full in the final chapter of the book, is but one facet of the

ongoing innovation revolution. However, any celebration must be

tempered by the fact that humanity is also entering a period of

dramatic global challenges. The world economy is undergOing

unprecedented changes due to several powerful trends that are

amplifying the disruptive impact of 2417 global connectivity and

rapid technological change.

One such trend is the transformation of humans into a

primarily urban species. For the first time in human history, more

than half of mankind lives in urban areas. Within a few decades,

that figure will approach three-quarters of the global population.

Most of these people will live in the sprawling megacities of the

developing world, not just the familiar Shanghais and Sao Paulos

but the dozens of other less well-known cities in China with a

population already bigger than Philadelphia's.

Mass urbanization will both demand faster and deeper

innovation and provide the means for getting it. It will demand

innovation because crowding ever more people into megacities

will strain urban infrastructure, political systems, and civility to

the breaking point. That requires imaginative responses. Happily,

this migration promises to spark many new waves of innovation,

as cities have long proved essential crucibles of creativity.

Geoffrey West of the Santa Fe Institute has found that the average

city slicker is three times as creative as the average country

bumpkin. He also found that the creative output of a city scales

nonlinearly. A city that is 50 times the size of a village nearby is,

on the average, 130 times as innovative on such measures as

creative output, research budgets, inventions, and so on.

Another of the big trends demanding a global innovation

response is the rise of China, India, and other giant economies of

the emerging world. The striking economic gains posted by the

BRIC economies and their less-famous emerging brethren are

surely to be applauded, for two reasons. Within one generation,

more than a billion people have been lifted out of the most

grinding poverty imaginable into lives of relative comfort. That is

something unprecedented in human history. More amazingly, the

rise of those economics raises the tantalizing prospect of

eradicating of global poverty within the lifetimes of those born

today. And the rapid rise of the middle classes in those countries

could prove the salvation of companies in stagnant or slow­

growing economies of the developed world.

But again, that silvery cloud comes with a dark lining. The

economic growth in these developing economies is guzzling

precious resources such as oil and commodities, raising concerns

about food scarcity and greatly fueling global warming and local

environmental crises. If this astonishing demographic and

geographic transformation happens on business-as-usual trends­

if development follows the worst examples from the rich world

(think American-style exurban sprawl)-this is an ecological and

human tragedy waiting to happen. That is because public policies,

technologies, and markets are not organized to deal with the kind

of stress that is about to be put on the world's essential

infrastructure, ecosystems, and resource base.

The most difficult aspect of the resource puzzle is that many

different pieces of the puzzle actually fit together in ways that

make simple, sHoed solutions irrelevant. Energy issues could be

more easily solved, for example, if many forms of energy

conversion did not consume and pollute huge amounts of water.

Water scarcity could be dealt with by desalination, but the

equipment for removing salt from seawater uses enormous

amounts of energy. Lack of fresh water and freakish droughts

(aggravated by climate change) are a big reason food prices are

up-but in turn, most of the world's fresh water is consumed in

highly inefficient fashion by the agricultural sector, not by heavy

industry or thirsty urban households. The World Economic

Forum has dubbed this the �water-energy-food-climate nexus"

and has set up a high-level group of experts, government leaders,

and corporate bosses to come up with possible solutions. One of

those heavyweights is Indra Nooyi, the chairman of Pepsi, and

she argues that "the only way to measurably and sustainably

improve this dire situation is through broad-scale collaborative

efforts between governments, industry, academia, and other

stakeholders around the world. "

These grand global challenges certainly add up to a mighty

headwind for the global economy, but Nooyi is right to suggest

that these challenges can be overcome if creative and

collaborative solutions are advanced to identify and reward

innovations that tackle society's big problems. This distinction

matters, because innovation is not always a good thing. For

example, a lot of technological invention is directed at coming up

with gadgets and gizmos of negligible business or social value.

And the drug lords and mafias of the world are often highly

entrepreneurial, but their business-model innovations are hardly

to be applauded.

William Baumol, a distinguished economist at New York

University's Stern School of Business. has spent a lifetime

studying this topic. He argues that, without innovative

entrepreneurship, the growth miracle of the last two centuries

would not have happened-but he hastens to add that

entrepreneurial activities are not always productive and growth­

enhancing. In fact. across almost all of history. most such efforts

were directed at redistribution rather than at producing new

wealth: aggressive warfare. larceny. bribery. and rent-seeking

litigation, among many others. Autocracy. the absence of the rule

of law. and prevailing cultural norms allowed elites and free

riders to capture most of the gains produced by innovative

entrepreneurship throughout history. But starting at some point

before the industrial revolution. most notably in Florence and

Antwerp, attitudes and institutional arrangements changed so that

productive capitalism-which enhances the general welfare. even

as it enriches the individual entrepreneur-rather than rent­

seeking and deviant entrepreneurship came to be prized and

rewarded. That as much as anything explains the transition from

millennia of stagnation. disempowerment. and oppression to the

economic dynamism, social mobility. and democratic advances

seen in the last few centuries.

Now it is time to double down on that tried-and-true pathway

to growth by using the tools of innovation to turn the world's

grand challenges into this century's greatest economic

opportunities. The key is for society to find ways to reward

socially useful innovation. That is not to say that the inventor of

the next Pet Rock or erection pill should not be handsomely

rewarded: if such inventions satisfy unmet consumer needs, they

do represent value-creating innovations and therefore deserve

market success. But plenty of other unmet human needs also

require urgent attention, ranging from fresh water and affordable

food to protection from climate change and pandemics.

Unfortunately. the free market does not currently provide

adequate returns for innovators who work on such difficult

problems.

That argues for a rethink of public policies, which need to roll

in the externalities of such actions as burning fossil fuels through

carbon pricing and other mechanisms that will reward

investments in clean energy. It argues for corporations to think

beyond quarterly results to creating long-term value, which can

be done only if the true social and environmental impacts of

business are taken into account. And it calls for individuals to be

more mindful of their consumer choices, which can have

unintended ripple effects across the global supply chain. If the

growth to come in this century follows such a thoughtful path,

one that is mindful of ecosystem impact and human health

concerns, one that leads with innovation rather than blundering

and blustering ahead with business as usual, then the current

challenge turns into an extraordinary opportunity for economic

growth and human advancement.

For that to happen requires a radical rethink of why and how

to innovate. Today's understandable concerns about managing

security and fixing finance must be seen through that prism. The

world has spent the first decade of this new century fighting

conventional battles, looking in the rearview mirror. The two

grand global challenges taken on thus far are terrorism after 9/1 1

and the financial crisis after the collapse of Lehman Brothers.

These are necessary battles, of course, and at the moment they

seem to be the most important ones imaginable. But they are not,

in fact, new ones: political terrorism has been around for more

than a millennium, and capitalism has always gone hand in hand

with global financial crises-just think of the South Seas bubble

and tulip mania of yore.

Look from the perspective of the children born today, and it

becomes clear that terrorism and financial panic are not the most

difficult of the global challenges. Seen from the vantage point of

2050 or 2100, the big challenge for current generations is the

handling of the unprecedented demographic, economic, and

environmental transformation that is happening on this watch.

Larry Brilliant is a big believer in innovation. He should be,

given the fact that he is a medical doctor who used a powerful

vaccine to help eradicate smallpox in India. He later started

Google's philanthropic division, known as Google.org, and now

runs the Skoll Global Threats Fund (started with money from Jeff

Skoll, the cofounder of eBay) . His career progression telegraphs

his view of the world. He is very concerned today about the

prospects of interlinked global challenges that he considers

catastrophic risks. "We live in an uncertain, complex age," he

says, "and the problems of water scarcity, climate change, and

pandemics all have the same root cause: too many people living

unconsciously." He believes global governance must change to

acknowledge the growing number of existential threats. In early

201 1 , that view received an endorsement from a surprising

quarter: China, the aspiring global innovation champion. Zhou

Shengxian, the country's environment minister, declared that "in

China's thousands of years of civilization, the conflict between

mankind and nature has never been as serious as it is today."

That juxtaposition of a new golden age for innovation with

wicked global problems again raises that important question: are

these the best of times or the worst of times? One could argue that

the question itself is irrelevant; it's always a bit of both. Perhaps,

but occasionally humanity also reaches inflection pOints in history

when the decisions people make, as individuals and together as

societies, propel the species decisively in one direction or

another. This is one of those inflection points.

There have been occasional periods of history when peace and

progress brought tremendous prosperity (think Pax Romana and

the Victorian age of invention) or when death and destruction

doomed unfortunates to lives of grinding misery (as during the

Dark Ages and the Great War). The world is approaching such a

crossroads today. The decisions made in the next decade about

how to live, the direction economies will take, how resource­

intensive development will be, and whether society will do more

to reward socially useful innovation will have profound, planet­

altering consequences that will last a century or more.

There is now a great race under way between the forces of

development and those of degradation. The fate of people and the

planet hangs in the balance, and the outcome is not preordained.

Even so, mankind can tip the scales in favor of a positive

outcome-if the pace of global innovation is accelerated. How to

do that, exactly? Part of the answer lies in better-coordinated,

scaled-up, and patient efforts at innovation at the global level.

Investing in the Global Commons

John Kao is one of the world's leading innovation gurus. He is

sunny by disposition, and qUick with a smile and a warm

anecdote. He has been known to bring down the house at

corporate meetings by belting out a couple of jazzy numbers on

the piano (he toured with Frank Zappa in younger days). Indeed,

his breakthrough book is called jamming, and it compares the art

of innovation with the controlled chaos involved in making great

jazz music. He is not so cheerful anymore. He is convinced that

the core dilemma today is that more and more people are

competing over the world's resources, so mankind has to find

innovative ways to make more from less. Doing this will require

�an unprecedented marshalling of intellectual energy and of

innovation capacity."

What the world needs, he argues, is a new operating model of

innovation itself-what he calls large-scale innovation. He

argues, intriguingly, that individual and corporate efforts are no

longer enough. Dealing with the world's wicked problems will

require societies themselves to become engines of innovation.

Rather than putting out fires when they flare up, he says,

countries must organize themselves to innovate at scale so as to

build resilience, prevent meltdowns, and invest in nurturing the

industries of the future. He points to Finland's evolution from a

focus on mobile telephony to health and wellness services as one

example. Another is Singapore's thoughtful and multipronged

strategy for dealing with water scarcity. Kao's Institute of Large

Scale Innovation, which counts policy makers and official

advisors from several dozen countries around the world as

members, spreads such best practices in the belief that �a global

vision of innovation . . . may be how we save our increasingly

crowded, fragile and interdependent planet."

Bill Gates is also convinced that the world's wicked problems

require bold new approaches. He is doing his part by using the

heft and resources of his Gates Foundation to stimulate global­

scale innovation. For example, the charity's Grand Challenges

program awards cash prizes and publicity to clever thinkers

anywhere who can come up with novel solutions to the problems

it is trying to tackle. He is convinced that society greatly

underinvests in innovation, and he wants to see greater outlays on

education, research and development, and other bits of societal

infrastructure that boost innovative capacity. He also thinks

private sector investors need to take a longer-term view if they

are to fund the breakthrough technologies and industries of the

future. He pOints approvingly at the strategies undertaken by two

novel investment outfits, Intellectual Ventures and Khosla

Ventures. as models for how the private sector can help scale

solutions to those wicked problems.

"On the face of it, why should the Gates Foundation bother

with us?" asks Edward lung rhetorically. "They have access to

the best minds and technology already." Yet, he insists, his firm is

needed by outfits such as the foundations that are seeking fresh

ideas to deal with incredibly difficult challenges, including the

eradication of malaria or polio. lung is a cofounder of Intellectual

Ventures, an outfit that is an odd mix of investment fund,

technology developer, and (by lung's own admission) patent troll.

Because the firm has a very long view on its investments-he

says twenty years is the shortest investment window his fund

considers-it has the patience to invest in complex technologies

in fields such as low-carbon energy (it is funding the development

of radically different nuclear plants) and public health (it has

come up with lasers to zap malarial mosquitoes) that take time to

mature.

The firm gained notoriety when the book SuperFreakonomics

made much of its radical geoengineering approaches to dealing

with climate change, which many environmentalists took to mean

it was not serious about dealing with the causes of global

warming on the ground. But lung insists the authors of that book

picked just the most eye-catching of the many alternatives his

firm is working on in this area. He explains that because the firm

is not a peddler of any given technology. unlike multinational

engineering giants, it has the freedom to develop a variety of

possible solutions based on a set of scenarios. Most efforts at

taking on wicked problems fail, so jung believes such problems

require a patient portfolio approach that builds in failure as part of

the business model: "Unlike a venture capital fund, who takes ten

shots a year, we take hundreds a year . . . but our wide portfolio

means we don't have to pick which technology and application

will come first." The firm is willing to make less money by taking

less risk in the aggregate, and in doing so is paving the way for

many others who will profit handsomely from taking the

technologies it nurtures to market.

One of those who intends to profit by saving the world is

Vinod Khosla. "I have a religious belief in the power of ideas

propelled by entrepreneurial energy," he declares. Coming from

some businessmen, such talk might sound self-serving or plain

nutty. But Khosla helped to found Sun Microsystems, a company

that pioneered such essential bits of Internet technology as

network servers and java, a programming language. He then

made his name and his fortune as a partner at Kleiner Perkins, a

Silicon Valley venture capital firm famous for its early

investments in AOL, Amazon. Compaq. and Coogle.

His eyes have turned toward a new target, the oil industry. and

he is now busy plowing his billions into esoteric clean-energy

technologies. Why is Khosla taking on this particular crusade

when he could concentrate on the technology investments that

have served him so well, or even opt for a gilded retirement? Like

many very rich men, he now wants to improve the world: "just

starting another Sun doesn't do it for me anymore." As an

engineer turned venture capitalist, Khosla has a healthy respect

for the power of new technologies to create disruptive

innovations. And the free marketeer in him clearly relishes the

prospect of really taking on the big, rich, and well-entrenched

firms that dominate the oil industry.

Another part of the explanation lies in his complex

relationship with India. Like several of Silicon Valley's most

successful people, Khosla boasts a degree from the Indian

Institute of Technology. When he tried to start a project to help

the mother country, he was initially frustrated by its bureaucracy

and corruption. His first attempt to start a traditional top-down

charity failed. so he now funds only charities embracing

microenterprise approaches. A lesson he learned from India, he

says, is that one has to think big: "Unless you influence the lives

of at least a million people. it simply doesn't matter."

His plan is to use technology and entrepreneurship to tackle

big social and environmental problems at scale. �In venture

capital, we fail far more often than we succeed," he says. "I've

decided that I'd better focus on taking on problems that really

matter. so that when I win. it makes a difference to the world. " He

has developed an investment strategy that pours pots of resources

into high-risk but potentially game-changing energy technologies

-what he calls black swans-in hopes that one or two of these

neglected ideas may one day save the planet. He pooh-poohs

fashionable areas of green investment such as hybrid cars and

photovoltaic cells as mere greenwashing, choosing instead to put

his money into radical technologies that can transform huge

markets such as engines, lighting, cement, water, and buildings.

He insists that any such technology. when scaled, must pass what

he calls the �Chindia test": prices must be low enough to be

attractive in China and India.

Tackling the grand, and thus far, mostly ignored challenges of

the twenty-first century-what some have called the most wicked

of the current problems-will require better tools, smarter

approaches, and, most important, much more ambition. Given

that these are global problems, it only makes sense that part of the

solution lies in better global coordination, pushing for worldwide

economies of scale, and taking the very long view. However, top­

down solutions will simply not be enough, no matter how clever

or benevolent the visionary behind them.

In fact, tackling the twenty-first century's most difficult

problems will require a completely different approach that also

taps into the wisdom of crowds and uses bottom-up innovation. If

you doubt it, consider the threat posed to humanity by just one of

these wicked problems: pandemic disease.

Beware the Superbug

�There is simply no greater threat to humanity than a viral

pandemic," declares Nathan Wolfe. Though he is young and

dashing-the New Yoder declared his demeanor to be �a cross

between a pirate and a graduate student"-Wolfe is no armchair

alarmist. He is one of the world's leading virologists, fighting on

the front lines to save the world from the next deadly wave of

HIV, SARS, or influenza. From the Mekong delta to the strife­

torn jungles of the Congo, he and his team are building a global

�viral surveillance" network that he hopes will monitor the

tropical hot spots that have in the past produced such deadly

viruses so that investigators can nip them in the bud.

Monitoring the blood of bush-meat hunters in Africa and

chicken farmers in China may seem an esoteric or academic

exercise to those sitting in comfortable homes in faraway places

such as New York or London. In fact, it's not. Because of the

astonishing growth of globalization, air travel and container

shipping now connect each corner of the world to every other.

The rapid advance of urbanization and deforestation is whittling

away the last of the truly wild places on earth, which have always

been the greatest source of disruptive and deadly new human

viruses such as HIV.

Gabriel Leung knows this all too well. Leung is one of Asia's

leading experts on infectious diseases and even served for a time

as the Hong Kong government official in charge of pandemic

preparedness. That city is especially important to the rest of the

world for two reasons. First, it is close to the Pearl River delta,

one of a handful of viral hot spots that, thanks to close contact

between humans and wild animals, are sources of many potential

viral threats. Second, Hong Kong is a major hub for air travel, so

a deadly bug that passes undetected by the city's health officials

could qUickly travel around the world and cause a potential

pandemic, as SARS did a few years ago. �We are the world's

sentinel for pandemics," Leung says.

It is no longer implausible that a new virus would leap from a

remote farm in rural China to the �wet markets" outside Hong

Kong and onto an international jetliner bound for Europe or North

America. That sort of leapfrog is exactly what happened when

SARS appeared out of nowhere in Asia and within weeks shut

down large parts of the Canadian economy. So big was the

economic blow that the Rolling Stones even headlined a huge

benefit concert in 2003 for Toronto that attracted some half a

million people. Such a leap is probably what happened in 2009

with the appearance of the HINt flu that surfaced in Mexico but

which turned into a global pandemic. The virulence of that

particular viral cocktail was not as deadly as it could have been.

But the world almost certainly dodged a bullet with HINt, given

the global lack of preparedness, and next time things may not go

so well.

Africa is the hot spot for blood-borne diseases, but the hot

spots for respiratory killers such as SARS and HINI include

China and Southeast Asia. To take just one example,

globalization, rising prosperity, and increased meat consumption

mean that the number of chickens raised for food has increased

manyfold in the past few decades. The problem is that in parts of

this region, humans and animals live so close together that an

exchange of viruses (called �viral chatter") is almost inevitable.

Adding to this deadly formula are the side effects of rapid

economic growth. As reckless development leads to depleted

aquifers and diminished agricultural yields, farmers chop down

ever more trees. But those trees used to serve as essential buffers

between mankind and the zoonoses, as scientists call diseases that

jump from animals-bats, monkeys, wild cats-to humans. The

rising temperatures and ecosystem changes that are coming with

climate change are driving wild animals closer to human

settlements too, exacerbating the problem.

In short, the world is now entering a dangerous new age of

pandemic diseases. Zoonoses are on the rise in the world's hot

spots. These already account for the lion's share of all new

infection threats. Some of these are familiar already-West Nile

virus, Ebola, SARS, HINt. But the really scary part of this tale is

that these are but the tip of the iceberg. There may be a million or

more viruses waiting to be discovered in Africa alone, and the

world may well see the sudden emergence of a new such virus

with deadly global pandemic potential each and every year this

century. In The Viral 5to17n, Wolfe argues that �the historical

approaches to dealing with pandemics-wait and see followed by

a rush to diagnostic and vaccine development-will not be

sufficient and will fail as they have with HIV." What is needed,

he argues, "are radical new approaches and a paradigm shift away

from response and toward pandemic prevention."

Fleming's Prescient Warning

If that's not scary enough, consider the threat posed by superbugs

of the bacterial, not viral, variety. These are on the rise because

many antibiotics-which, along with vaccines, are probably the

technological innovations that have saved the most lives in

human history-are losing their effectiveness. Alexander

Fleming, who helped discover antibiotics, issued this stark

warning during his Nobel Prize acceptance speech in 1945:

�There is the danger that the ignorant man may easily underdose

himself and by exposing his microbes to nonlethal quantities of

the drug make them resistant."

Today, antibiotic resistance is a costly and dangerous problem.

Yet those who misuse these wonder drugs mostly do not pay the

cost. Patients pressure their doctors to give them pOintless

antibiotics for viral infections such as colds or the flu, and courses

are often left unfinished. In some parts of the world, antibiotics

can be bought without a prescription. Analyzing official figures

from the Food and Drug Administration, Louise Slaughter, an

American congresswoman who is a microbiologist by training,

calculates that four-fifths of the antibiotics used in the United

States are given to livestock-often to get perfectly healthy

animals to grow faster.

Antibiotic resistance causes longer and more serious illnesses,

lengthens stays in hospitals, and complicates treatments.

Occasionally, people have died when they need not have. Today,

resistant bacteria mostly threaten children, the elderly, cancer

patients, and the chronically ill. However, the reason to worry is

that this is likely to be a harbinger of worse things to come. Each

year there are nearly 450,000 new cases of tuberculosis that is

resistant to multiple drugs, causing at least 150,000 deaths. More

than a quarter of new cases of TB identified recently in parts of

Russia were of this troublesome variety.

Added up, the costs are enormous. In the United States alone,

the Alliance for the Prudent Use of Antibiotics, a nonprofit group,

calculates that resistance to antibiotics causes $ 1 7 billion to $26

billion per year in additional costs to the health care system. In

one study, a random sample of 1 ,400 patients at an American

teaching hospital found such resistance in 188 people; twelve

additional deaths resulted.

The prohlem. however. is ::I gloh::ll one. ::Inr1 there is :mother,

less obvious cost. In many poor countries, the cost of drugs

gobbles up half or more of the total health budget. As resistance

grows, pOints out a task force organized by the Center for Global

Development, patients are forced to turn from failed front-line

therapies to second-line drugs. These are scarcer and much more

expensive. For the cost of treating just one patient with

extensively drug-resistant TB, a hospital could treat two hundred

with the ordinary variety of TB. So the burden is in the form of

greater ill health for the poor and higher health care costs for the

rich as proven therapies fail and new superbugs-that is, drug­

resistant strains of bacteria-take off.

Some skeptics argue that the global rise in drug resistance,

while a problem for those with weakened immune systems, is not

a problem for healthy adults. A related argument maintains that

overuse of antibiotics does not necessarily lead to an increase in

resistance. Herman Goossens, a prominent microbiologist at the

University of Antwerp, vigorously disagrees. He conducted a

double-blind, placebo-controlled trial, the results of which were

published in the respected medical journal Lancet, which

debunked both arguments. His team divided healthy volunteers

into three groups and randomly gave them either azithromycin or

clarithromycin, two common antibiotics, or a placebo.

Researchers then checked the streptococcus bacteria that naturally

reside in throats.

What they found proved what doctors and researchers had

claimed for many years. The patients taking the placebo had no

drug-resistant strains of streptococcus, but within days those on

either antibiotic suddenly had streptococcus with sharply elevated

levels of resistance to those same two antibiotics. Goossens

explains that exposing healthy patients to antibiotics leads to

nonresistant bacteria acquiring the genes that provide resistance.

In his view. the fact that the streptococci retained this resistance

for over a year, during which period they replicated many times

over, challenges the theory that bacteria do not want to be drug

resistant. �This argument is no longer valid in real life, as some

bacteria do get resistance and we have shown they are fit­

indeed, the bugs select for resistance fast and stay fit for over a

year."

No surprise, then, that new superbugs are now emerging at a

steady pace, and the media are noticing. At the end of 2010, a

genetic mutation, NDM-l (quickly dubbed the "New Delhi

superbug"), was identified in India. This new bacterial strain led

to panic because it was resistant even to powerful antibiotics

often used as treatments of last resort. Resistance was found to be

able to transfer between different species of bacteria. The

immediate backlash in the British media held that Indian hospitals

were to blame, and even credentialed experts argued that British

"health tourists" should think twice about getting cheap surgeries

done in India. But Srinath Reddy, head of the Public Health

Foundation of India, offered this chilling observation about

NDM-l : "Antibiotic resistance is a global problem, there's no

need to finger-point India . . . thanks to international travel, we

now have a virtually inexhaustible supply of human hosts so they

can easily mutate into more virulent forms."

Alarmed by the crisis at hand. the World Health Organization

declared that the annual World Health Day for 201 1 , celebrated

on April 7. be devoted to the topic of antimicrobial resistance.

�No action today, no cure tomorrow" was the motto. And to be

fair, there has been some action of late. The Infectious Diseases

Society of America has issued its 10 x '20 Initiative. which calls

for the development of ten new antibiotics by 2020. A

transatlantic task force has been formed to look into this problem.

Bills were also introduced in the U.S. Congress that would

address some parts of the puzzle. such as curbing the use of

antibiotics in healthy livestock (to get them to grow faster).

However, these efforts miss the pOint. argues Ramanan

Laxminarayan of Princeton University and the Center for Disease

Dynamics, Economics and Policy. a think tank. He was an early

advocate of thinking about drug resistance as a global-commons

problem. For one thing, simply paying for new antibiotics is an

expensive proposition that does not ensure they will be managed

effectively in the future. Also, he argues they fail to deal

comprehensively with the incentives that lead to overuse of this

global shared resource-antibiotics effectiveness-on both the

demand and supply sides of the equation.

First. to demand. According to an opinion piece published in

2010 in the Journal of the American Medical Association. as

much as 50 percent of antibiotic use is unnecessary or

inappropriaLe. Overuse. misuse. improper dusing, and the use uf

substandard or diluted medicines all contribute to the rise of

resistance. But so too do weak health systems and governance:

unless a strict code of practice forbids overuse and systems are in

place to monitor behavior, doctors have every incentive to treat

the patient in front of them rather than worry about the theoretical

patient a decade hence who may suffer from the consequences of

antibiotics overuse.

Many Bugs, Few Drugs

The supply side of the equation is equally gloomy, as the pipeline

is drying up. From 1983 to 1987, sixteen new antibiotics won

approval from the U.S. Food and Drug Administration (FDA) .

From 2003 to 2007, only five won approval. Pharmaceutical

firms have not come up with a new first-line TB drug in many

years. Penicillin, still considered something of a miracle drug, is

now much less useful than it used to be thanks to the rapid growth

of resistance. That frightens Barry Bloom, a former dean of the

Harvard School of Public Health, who sighs, �I can't even

imagine what we'll do if we lose penicillin,"

Why did the industry hit such a dry spell? Kim Lewis of

Northeastern University argues that the pharmaceutical industry

�overmined" this resource during the golden era of antibiotics

half a century ago. Having picked the low-hanging fruit, goes the

argument, the science has simply gotten harder.

Ah, but even if the science has gotten harder, surely scientific

progress over the past few decades has helped? The drug industry

did pour hefty sums into applying genomics, proteomics, and

high-throughput screening to this problem. Alas, it did not work.

Despite spending millions of pounds on this effort, argued David

Payne of GlaxoSmithKline, a British pharmaceutical giant, in a

striking paper he coauthored a few years ago, his firm and others

came up empty-handed: �It was clearly very hard to find targets,

so we stopped." Other drug research chiefs share his frustration.

Mark Fishman of Novartis, a Swiss rival, met with similar

frustration at the lack of big breakthroughs in genomics. So now,

he says, "we've gone back to the brute-force method of screening

millions of candidates that kill a bug-and then evaluating them

for safety in humans. "

There are signs that the pipeline crunch at Big Pharma may be

worsening, but some biotechnology firms are coming up with

novel approaches. Theravance, an American company, has come

up with an antibiotic that treats skin infections, including some

caused by MRSA-an especially nasty type of bacteria that is

resistant to many antibiotics. Cubist, another American biotech,

took a chance on a new antibiotic that also targets MRSA. The

drug, derived from a compound found at the base of Mount

Ararat in Turkey, had serious side effects, so it was discarded by

Eli Lilly, a big pharmaceutical firm. Cubist worked out how to

adjust its dosing so that it no longer causes permanent muscle

damage, and now the antibiotic is a commercial success.

"We want to regreen the tree from the golden era of antibiotics

research!" exclaims Andrew Myers, a Harvard chemist whose

ideas are being developed by Tetraphase, a biotechnology firm.

Tetracyclines are a class of antibiotics that have been around for

decades. However, research into this area slowed down and few

new drugs were approved in this class in the past thirty years. But

a dozen years of research led Myers to a novel way to synthesize

new drugs in this class-a process that Tetraphase is now hoping

to commercialize. He is convinced that such scrutiny of other

existing classes of antibiotics may also lead to similar

breakthroughs.

Kim Lewis of Northeastern is working on radically different

approaches. For example, bacteria are typically grown in a petri

dish. Only 1 percent of the microorganisms collected from the

natural environment can actually be cultured in the laboratory-a

precondition to developing useful new drugs from them. Lewis's

research, published in Chemistry and Biology, fingers a culprit.

His team found that the bacteria in question lack siderophores,

compounds that bind iron for them, so the microorganisms fail to

grow in the petri dish despite swimming in nutrients. He thinks

there are many more growth factors for previously uncultured

bacteria. If he is right, it may open up a new way to discover

antibiotics. "This will give us tools to access biodiversity that

have been hidden from us," he thinks.

Roger Pomerantz of Merck, another giant American

pharmaceutical firm, vows that his company is committed to

research in this area for the long haul. And it is not after just

incremental improvements, as "we are looking for clear major

leaps," he insists. Pushed on the matter, though, he concedes it

will not be easy: "As this area matures, it gets harder to hit the

innovation threshold, as we are victims of our own success."

A Tragedy of the Commons

The sad truth is that this industry is a victim of misaligned

economic incentives that make it hard for private sector firms to

justify plowing billions into long-term research in this area, even

though it is very clearly in the interests of society for such work

to be done-and done now. For example. even if a company

comes up with a great new anti-infective, such a drug will likely

earn it far less than remedies for chronic diseases or even those

for mundane problems such as erectile dysfunction. That is

because a good antibiotic works in a week to two weeks and may

never be needed again: it is therefore far less profitable than. say.

a statin that must be taken every day for years on end. Many

government-run health systems unfairly reward anticancer and

central nervous system drugs more handsomely than antibiotics,

even though the latter offer more bang for the buck in terms of

reducing mortality and morbidity.

That is why it is probably too much to expect the

pharmaceutical industry alone to solve this problem, says

Ramanan Laxminarayan, given the legion of market and

regulatory failures involved in this global resource problem. That

argues both for bigger carrots, in the form of financial incentives

for the development and use of both new antibiotics and

companion rapid-diagnosis systems (it is suspected that only a

tenth of TB cases globally are diagnosed properly and in a timely

fashion), and for bigger sticks in the shape of treatment and

dispensation gUidelines for doctors and pharmacists. It also

suggests that novel forms of open innovation, be they Web-based

collaborations between academia and pharmaceutical firms or

public�private partnerships, may be necessary to shoulder the

developmental risk involved in such long-term research.

Bottom-up approaches are attractive for another reason. Even

coming up with breakthroughs in antibiotics would be akin to

wasting precious water by pouring it into a leaky bucket.

Tackling this problem requires fixing the bucket by dealing with

the demand side of the equation.

Reining in overuse, misuse, and abuse will be difficult and

will require concerted action by governments, companies, and

health care providers. Well-meaning aid agencies and charities

dispensing drugs freely in poor countries should ask themselves

whether the necessary safeguards and patient education are in

place for proper use of powerful drugs. Governments in some

countries, such as China, that link financial reimbursement for

doctors and hospitals with the amount of drugs dispensed must

abolish that perverse practice.

Regulators must do better in their monitoring and public

health surveillance, so that counterfeit or substandard drugs

(containing less than the proper dose of active ingredients, for

example) do not get to unwitting patients. Companies that hope to

profit from antibiotics can do more to encourage the development

of rapid and portable diagnostics-a mushrooming field-so that

their pills are popped only when they will actually help the

patient.

Ultimately, it is the doctor-patient relationship that is

paramount. Because both doctor and patient have a legitimate

self-interest in curing the crisis apparent today, not the one that

may come tomorrow due to growing drug resistance, both have

incentives to overuse antibiotics. Medical associations can put in

place more rigorous training and drug dispensation protocols that,

for example, insist that doctors follow up with patients to make

sure they have completed their entire course of antibiotics.

All of the top-down solutions will come to naught, however, if

patients continue to abuse these drugs. In the end, solving this

problem probably requires the ordinary person to behave just a bit

less selfishly. In this, the superbugs problem is much like climate

change and other tragedies of the commons: the greatest hope

may be offered by bottom-up solutions that start with individual

responsibility and are enriched by top-down coordination and

democratic technology.

The Perfect Storm

The good news on the antivirus front is that pioneers are starting

to answer this call to arms. To see how, travel with Nathan Wolfe

to Cameroon, where his Global Viral Forecasting Initiative has

set up a world-class virus-monitoring center. His team ventures

into the deep jungle, setting up networks of relationships with

people who hunt bush meat (such forbidden wild animals as

gorilla and chimp), as they are most prone to the viral chatter

between species that leads to zoonoses. They take blood

specimens from both the hunters and their game, run the samples

through advanced gene-sequencing machines, and try to predict

which deadly virus will be the next to make the jump into

humans.

Now Wolfe wants to go further. He believes that a

combination of mobile telephony and information technologies,

deployed in a robust global surveillance system, can catch the

next SARS or HIV long before it turns into a global pandemic.

The key, he says, is early detection and early response, based on

information fed in from the grassroots.

One relatively new tool in the box is digital detection.

Researchers at Google. MIT's Media Lab, IBM, and other outfits

are applying sophisticated software tools to try to predict

outbreaks of disease. For example, software can crawl the Web

and look for press reports in many languages that point to the

outbreak of an unusual disease. This is valuable, as countries

suffering outbreaks of potential pandemics-China and Thailand

are recent examples-typically are not eager to advertise this fact

out of fear of hurting tourism or exports. Google has

demonstrated how this technique was able to predict outbreaks of

plain-vanilla seasonal flu in the United States a week or more

before the government's Centers for Disease Control did.

Overcoming its initial skepticism, the public health

establishment is now coming around to the use of such

communications technologies in the quest to predict, prepare for,

and pOSSibly prevent the next great pandemic. John Brownstein of

the Children' s Hospital Boston and colleagues published a

thoughtful endorsement of these technologies in the New England

joarnal of Medicine in 2009. They argued not only that the

adoption by health officials of distributed communications

technologies and Web-crawling software would be useful, but

also that ultimately they �expect that patients' contributions to

disease surveillance will increase. Eventually, mobile phone

technology, enabled by global positioning systems and coupled

with short-message-service messaging (texting) and 'micro­

blogging' (with Twitter), might also come into play." Strikingly,

the researchers concluded that "Internet-based systems are

qUickly becoming dominant sources of information on emerging

diseases. "

The catch is that while such �rumor registries" are useful, any

leads must still be validated by boots on the ground-such as

Wolfe's shock troops. Public health surveillance systems are

increasingly using mobile phones and smart handheld devices for

this task too. When Kenyan officials suspected in 2008 that

Somali refugees might have brought polio into the country for the

first time in twenty years, they alerted health workers in the area,

who used their mobile phones to log patient symptoms,

medications dispensed, and so on. By analyzing those data

remotely, health officials in the capital were able to contain the

outbreak.

Building on that success, Wolfe now wants to transform

surveillance into a predictive tool rather than wait for signs of

trouble. One technology he considers promising is the "lab on a

chip." Researchers around the world are now rushing to develop

portable, fast, and affordable ways of analyzing samples out in

the field. At the moment, samples often need to be sent to distant

laboratories for analysis, a process that can take days or longer.

Wolfe thinks he will soon have a device that will identify an

unknown bug by using advanced genetic analysis. Think of it as a

crude form of tricorder, the handheld gizmo used on Star Trek to

scan alien environments.

He also sees great potential in the mobile phone. When he

visits remote parts of Congo not connected by road or electricity

grid, he often finds that there is cellular service. Locals are able to

use their mobile phones, recharging them at night using portable

generators. His team is developing a software system to offer

hunters an incentive (it might be a tiny financial payment, or

perhaps some sort of nonmonetary reward) to send an SMS

message letting him know when they are ill, which would provide

a useful early warning. Health workers would then be sent to test

the ailing hunter to see if there is cause for alarm.

Global health visionaries are now pondering a much more

interactive smart grid that can make sense of that hunter's initial

warning. One possible technology is FrontlineSMS, a free

application that allows health officials to analyze a huge flood of

text messages without the need for central servers or Internet

access. For a global surveillance system to be robust, though, it

must provide the people closest to the trouble with the

information and authority they need to act sWiftly. There are now

open-source applications such as Ushahidi (created by Kenyan

activists during that country's recent political strife) that put

together data from disparate mobile sources and combine them

with maps and other data to be used by field workers to act on a

warning. The Rockefeller Foundation, along with the United

Nations Foundation and others, is now encouraging such mobile

innovators to agree on best practices and common standards to

allow the most promising ideas to spread easily, quickly, and

widely.

That, in short, is how a band of brave and mostly unsung

innovators is beginning to prepare humanity for dealing with one

of the gravest risks of this new century. Dealing with such global

threats will be difficult, as both governance and market failures

need to be overcome, but it need not be impossible-especially if

governments get help from the private sector. The next section of

the book takes up that very question: how companies should

respond to such threats and opportunities.

In the case of superbugs, as with other potential disasters,

getting economic incentives right and deploying decentralized

technologies will help. And the early successes suggest that while

the world may indeed be getting riskier, today's innovation

revolution means mankind need not enter such a future unarmed.

As Wolfe puts it, �If the Internet is humanity's planetary nervous

system, we are now building our planetary immune system. "

2

Cheap and Cheerful

The dramatic rise of China, India, and other emerging­

maIiet powelhouses to date has been dIiven by cheap

labor and low-cost manufElcturing-but they are no longer

content with being the world's workshops. These countries

are rapidly moving up the value chain with indigenous and

often ingenious approaches to innovation. The resourceful

engineers of the East need to be taken seriously, for their

fmgal innovations are starting to leapfrog their firms to

the top of the global heap.

Developing economies are fertile telTain for

breakthrough innovation. Booming middle classes with

disposable income and lising expectations are creating

lucrative maliets. Legions of fresh graduates in technical

disciplines such as software engineering are providing the

brainpower needed to design the future. Add to that the

fact that most people in these countries still remember

what it means to be poor-meaning firms must opera.te

fmgally, producing affordable goods while using fewer

resources-and it produces the perfect conditions for

creative, clever, and occasionally brilliant products and

services.

This chapter shows why the rise of Asia 's fmgal

innovators puts established films in health care, energy,

automotive, and other historically dominant but now

troubled sectors of the rich world on notice. That is forcing

these indllstries fn Innk fnr fresh appmaches tn innnvatinn

in order to survive. Here 's why this disruption could

actaally be good news for the middle class in the United

States and other parts of the lich wOlJd.

Enter the principal cardiac operating room at Bangalore's

Wockhardt Hospital early any given morning, and you are likely

to find a patient lying on the operating table with a privacy screen

hanging between his head and chest. During a recent visit, the

table was occupied by a middle-aged Indian man whose serene

look suggested that he was ready for the serious heart operation to

come. Asked how he was, he smiled and answered in Kannada

that he felt fine. It was only when his visitor stood on a stool to

look over the screen did it become apparent that the patient's

chest cavity was already cut wide open.

IL lurns uuL thaL while lhe paLienl WaS chaLLing aWay. Vivek

Jawali and his team of surgeons had nearly completed the

complex bypass operation. Because such �beating heart" surgery

causes little pain and does not require general anesthesia or blood

thinners, patients are on their feet much faster than normal for this

procedure. This approach, pioneered by Wockhardt, has been so

safe and successful that medical tourists now come to Bangalore

from around the world.

This is but one example of India's extraordinary innovations

in this sector. Private health entrepreneurs are now directing the

country's rich technological and medical talents toward frugal

engineering approaches that should make the rich world's bloated

health systems envious. He is feted today as a pioneer, but Jawali

remembers how Western colleagues for years publicly ridiculed

him for advocating his inventive surgical techniques.

He thinks that snub reflects an innate cultural advantage

enjoyed by countries such as India. Unlike the hidebound health

systems of the developed world. he says. �in our country's

patient-centric health system, you must innovate. " He makes clear

that this does not mean the adoption of every fancy new piece of

equipment. Over the years, he has rejected surgical robots and

laparoscopic kits because the costs did not justify the supposed

benefits. Instead, he has looked for tools and techniques that spare

resources while improving outcomes.

Shivinder Singh, boss of Fortis, a rival Indian hospital chain

based in New Delhi that has since acquired Wockhardt as part of

a grand pan-Asian expansion strategy, provides more evidence

that Western technology multinationals have forgotten the art of

frugal engineering. The Duke-educated MBA observes that most

of the expensive imaging machines made by such firms are only

marginally better than older models. Meanwhile, vast markets for

poorer hospitals go unserved. �We got out of this arms race a few

years ago," he says. Fortis now promises its patients only that its

scanners are �world-class," not necessarily the newest. He asks a

sensible question: "Why can't these firms make more of less and

less of more?"

He is not alone in thinking that the many medical centers and

multinationals of the developed world are looking at innovation

the wrong way. Paul Yock is head of the biodesign laboratory at

Stanford University. He argues that in the past, medical

technology giants such as Europe's Philips and the u.s. company

Medtronic have �looked at need but been blind to cost." Given

growing concerns everywhere about runaway inflation in health

care costs, he insists, the business model that has so handsomely

benefited Medtronic and other Western med-tech firms "is not

going to work any longer."

He is convinced the only way forward is to turn the industry's

innovation process upside down. He teaches his graduate students

to put cost effectiveness much earlier in the invention process.

The key, he reckons, is first to identify a gap in the marketplace,

rather than coming up with nifty technologies that must then go

looking for a need. He finds inspiration in India. Convinced that

the country's combination of technical talent and financial

constraints will produce a world-class devices sector, he has

recently extended Stanford's design program to the subcontinent.

Though generic drugs probably come to mind first when

thinking of health innovation in India, the country's health system

is actually bursting with many less familiar examples. Inventive

firms are coming up with novel devices and information

technologies, clever business models, and the integration of all

these into radically different approaches to delivering affordable

health care. The catalyst is the combination of a vast and poor

population suffering from huge unmet health needs and a

dynamic private health sector eyeing a huge market opportunity.

Leapfrogging to the Top

How did the also-rans of the corporate world become the new

leaders of global management? The answer lies in leapfrogging.

Unlike rivals in the industries of developed economies,

companies in the developing world are often free of legacy. As

Gary Hamel and C. K. Prahalad have written, "The most effective

weapon new competitors possess is probably a clean sheet of

paper. And . . . an incumbent's greatest vulnerability is its belief

in accepted practice." These burdensome legacy systems can

range from antiquated infrastructure (such as the aging fleet of

coal-fired power plants in the United States, which still provide

over half of the country's grid electricity) to outmoded and

inefficient management practices (such as some European

medical device firms' insistence on gold-plating every new

scanner and testing device) .

Frugal engineering is about much more than just cost cutting.

Prahalad, the management thinker most closely associated with

this thesis, famously argued that there was a fortune at the bottom

of the pyramid-but that in order to profit by selling to customers

in the developing world, Western firms had to reinvent their

business models from the bottom up. Trying to peddle the wares

developed for rich markets without the frills will fail, he argued,

because costs will still be much too high. Rather, companies need

to start from scratch, figure out what the frugal consumer actually

wants from a product or service, and strip away all of the extra

costs ruthlessly. In one of his last writings before his untimely

death in 2010, he argued that elegant frugality will come to trump

conspicuous consumption even in rich countries. The recent

recession made clear, he argued, that "affordability and

sustainability, not premium pricing and abundance, should drive

innovation today."

That is a lesson that third-world innovators have taken to

heart. They are reinventing the entire value proposition of

business today, from supply chains to talent management to

product marketing and distribution. Many of these breakthroughs

do not involve snazzy technologies or new patents, though: the

advances are often incremental improvements in processes and

products. However, because these firms started out by putting the

needs of poor consumers first and building business models

around them, they do much better than rich-world counterparts

that have tried to rejigger Western business models to fit local

conditions.

Better Business Models

If you want a motorcycle, go to Chongqing. Although this dusty

central Chinese city of drab office buildings and perpetually gray

skies is better known as the gateway to the enormous Three

Gorges Dam, it is also the two-wheeler capital of the world. Led

by the region's pioneers, China now makes half the world's

motorcycles. But more important than the numbers produced is

the way these motorcycles are made-especially the way

designers, suppliers. and manufacturers have organized

themselves into a dynamic and entrepreneurial network.

Unlike state-run firms, the city's private sector upstarts, such

as Longxin and Zongshen, did not have big foreign partners with

deep pockets and proven designs, such as Honda or Suzuki. So

they came up with a different business model, one that was

simpler and more flexible. Instead of dictating every detail of the

parts they want from their suppliers. the motorcycle makers

specify only the important features, including size and weight,

and let outside designers improvise.

This so-called localized modularization approach has been

very successful and delivered big cost reductions and quality

improvements, says John Seely Brown, an innovation expert who

used to head the legendary Xerox Palo Alto Research Center

(PARC). It is one example of the sort of business model

innovation that he insists is far more radical than conventional

product or process innovation.

China Moves Ahead

Examples of these business model innovations are now bubbling

up from developing economies to threaten the established global

giants. Seely Brown and his collaborator John Hagel argue that

the activity of private entrepreneurs means " China is rapidly

emerging as the global center of management innovation,

pioneering m:m�gement techniques th�t most U.S. c:omp�nies �re

struggling to understand. "

Frugal innovators are reinventing business models in several

powerful ways. One of them is by outsourcing many activities­

and you thought jobs went only one way, from your home state to

Indian call centers! It turns out Chinese and Indian bosses also

need to worry about cheaper competitors, be they close to home

or in cheaper places such as Cambodia and Vietnam. Rather than

have vertically integrated business models, for example, Indian

telecom operators often outsource many parts of their value chain

-and are able to offer among the lowest rates in the world as a

result.

Another tactic is the inventive use of hybrid business models

and cross subsidies to achieve massive economies of scale.

Aravind, a pioneering Indian eye hospital chain, uses a tiered

pricing structure that charges wealthier patients more (for

example, for fancy meals or air-conditioned rooms), so it is able

to cross-subsidize free care for the very poorest. G.

Venkataswamy, the firm's deceased founder, was inspired by

McDonald's, and set off to achieve the same sort of scale in eye

care. Aravind staff screen more than 550,000 patients a year via

outreach camps in remote areas, referring more than 86,000 per

year for surgeries at its hospitals. International experts have

confirmed that the care offered is of the highest caliber, not least

because its doctors perform so many more surgeries than they

normally would in the West that they become extremely good at

them. And it is profitable, without donor aid or subsidies.

Indeed, the most vibrant of these third-world entrepreneurs are

those who escape the heavy hand of government. Entrepreneurs

in China must compete with privileged state firms with access to

cheap credit as well as the local arms of multinationals. That

makes China's � bamboo capitalists" extraordinarily resourceful in

trying to reach global markets. India has been less integrated into

the world economy, so many of its innovative firms have initially

concentrated on reaching poor consumers in the domestic market.

For instance, Seico, an Indian solar energy pioneer, found that

because many of its customers were living in remote areas, it had

to set up local networks of trained technicians to sell, install, and

repair its products, and it had to provide customers with small

loans.

Most of these Chinese and Indian innovators are not well

known, but it is only a matter of time before some will be. For

example, there are now more than four hundred firms designing

integrated circuits in China. So far they produce pragmatic,

copycat designs, but some will in time become world-class

innovators. One guru who forecast the rise of enterprise in the

Asian giants long ago is Tarun Khanna of Harvard Business

School. In Billions of Entrepreneurs, he observes that it is now

almost commonplace to imagine that one could build a billion­

dollar corporation from scratch without having to visit such

erstwhile temples of high finance as London or New York,

whereas two decades ago such a notion would have been

laughable. "Entrepreneurship has truly gone global," he

concludes.

The emergence of Asian world-beaters exemplifies the two

forces driving innovation: a new wave of globalization and the

spread of information technology. These two forces allow the

creation of unexpected and disruptive business models, such as

the one used by Chongqing's motorcycle makers. Other examples

include the design networks established by Taiwanese contract

producers in the textile industry. Groups of innovative just-in­

time suppliers abound in Asia, feeding Western fashion and

consumer goods companies.

They are often managed by supply chain experts, such as

Hong Kong's Li & Fung. Unlike Japan's keiretslJ, which bound

companies and their suppliers together with interlocking

shareholdings, these firms are free to leave their alliances. They

stay together only if they continue to learn and profit from the

experience. In some ways they resemble the nimble networks of

firms that underpinned Silicon Valley's success.

Low labor costs may have given such firms a head start, but

that is a transitory advantage. India's software innovators were

once sniffed at as merely low-cost offshoring and back-office

operations. But firms such as Infosys, Wi pro, and Tata

Consultancy Services (TCS) have become world leaders in

business software services. S. Ramadorai. who led TCS to

greatness, says his firm sees "innovation as a key enabler of its

productivity edge." He points out that it has been investing in

R&D for twenty-five years and holds numerous patents and

copyrights. TCS has won praise for its global innovation

ecosystem, which brings together academic labs, start-ups,

venture capital firms, large independent software firms, and some

of its most important customers.

Scourge or Savior?

Innovation is also changing the pharmaceutical industry. Small

biotechnology firms, using networked approaches, are getting

ahead of Big Pharma. This too opens the way for Asian

competitors, such as India's generic-drug champions. These firms

were once copycats, trampling on Western patents to make cheap

generic versions of drugs. But increasingly such firms are shifting

to process innovation and even the discovery of new drugs, as an

intriguing recent Indo-American pharmaceutical deal reveals.

Generic drugs have long been considered a scourge by

Western pharmaceutical firms. So it is ironic that the next great

opportunity for Big Pharma may lie in doing to Big Biotech

exactly what the generic-drug firms have done to traditional

pharmaceutical companies: decimate margins with cheaper

copies.

Pfizer, the world's biggest pharmaceutical firm, and Biocon,

India's largest biotechnology outfit, announced in late 2010 that

they will work together to bring �biosimilar" insulin treatments to

market. Biosimilars are generic impersonations (though, it must

be noted, not identical copies) of complicated biotech drugs.

Revealingly, it is the Indian upstart that will come up with the

original drugs and manufacture them; the American firm will

only market them. David Simmons of Pfizer explains that this

venture is part of his firm's new strategy to become a "one-stop

shop" for biosimilars.

His enthusiasm is understandable, given that this is the next

frontier for the industry. Biotech-based drugs account for only a

fifth or so of global drug sales, but sales are projected to grow at

double-digit rates. In contrast, many conventional drugs now face

declining sales and a steep cliff of patent expirations. Add the fact

that many biotech drugs enjoy enormous margins-some

treatments cost $ 1 00,000 or more per year-and it is easy to see

why this looks like ajuicy target for generic assault.

The example of biosimilars shows how the innovators of the

emerging world could, just possibly, end up rejuvenating rather

than burying the bloated industries of the West-if only, like

Pfizer, the big multinationals of the West swallow their pride and

accept they have much to learn from the brash upstarts.

Growing Global

The resourceful engineers of the East need to be taken seriously.

Their frugal and frantic innovations are leapfrogging their firms

toward the top tiers of the global heap. Roughly a tenth of the

Fortune 500 list of the world's biggest companies is now Chinese.

One of those companies, Huawei, is now one of the most

important manufacturers of telecommunications equipment in the

world. Tata, an Indian powerhouse, has not only come up with an

attractive small car that costs less than $4,000 (the Nano, which it

plans to export to Europe from India) but also shocked the car

industry by taking over Britain's Jaguar Land Rover.

And though China and India are in the lead, rich-world

innovators would also be wise to keep an eye on Brazilian rivals.

While the developed world saw economic growth shrivel during

the great recession of recent years. Brazil has grown robustly of

late. This will come as a shock to some, but it could overtake

Britain and France to become the world's fifth-biggest economy

by 2020.

The Latin American country's mining and agribusiness giants

are among the world's best, putting established multinationals

such as Rio Tinto and Cargill on the back foot on global markets.

Its huge and growing middle class already makes it one of the

world's five biggest markets for mobile phones, computers,

automobiles, cosmetics, and fizzy drinks. Andjust as China did a

few years ago with the Beijing Olympics and the Shanghai World

Expo, Brazil is opening up to the world for the FIF A World Cup

(2014) and the Olympics (2016) with a massive infrastructure

plan expected to top $50 billion.

While some Western multinationals have clearly understood

that an economic tsunami is coming, many others-especially in

asset-heavy, slow-moving industries such as steel and energy­

seem convinced their particular industries are not so vulnerable.

But even those �old economy" industries are now rapidly

becoming knowledge industries, whether they realize it or not,

and thus are also ripe for disruption, as the case of American

health care shows.

Competition Is Good for Your Health

Rather than fear the frugal engineers of the East. consumers in the

West should rejoice. By injecting a healthy dose of competition

and commonsense innovation into these industries, they may be

doing rich countries a favor. If you doubt it, travel an hour and a

half northeast out of Beijing on a winter work day. There you will

find a research and manufacturing facility built by Weigao, a

Chinese med-tech firm that started as a township enterprise. The

neatly manicured exterior gives way to a tidy but surprisingly

chilly complex of laboratories and shop floors. Only the clean

room, it seems, is fully climate controlled. That offers the first

lesson in frugal innovation: unlike in the comfortable corporate

campuses of the rich world, people shiver here while fancy

equipment stays warm.

Brave the cold, though, and you will find such seemingly

obscure local labs to be hotbeds of frugal innovation attracting

investment from the world's most successful multinationals.

Medtronic, an American med-tech giant, is a good example. After

years of selling high-end products, the firm entered into a joint

venture in 2009 with Weigao. Now, local and foreign-trained

designers and engineers work side by side in the facility outside

BeUing. They have already launched half a dozen inexpensive,

novel products that Medtronic would not have made on its own.

Impressive, but what led to the U turn? Simon Li, the well

connected head of the joint venture, says three things persuaded

Medtronic's executive committee to see China "not as a host but

as a home. " The growth of secondary cities creates enormous

opportunities for less-expensive technologies. The Chinese

government's big push on "indigenous innovation" gives the edge

to local firms in tendering. procurement, and so on. (An engineer

gleefully pOints out that as a local entity, the Medtronic joint

venture has affordable access to valuable metals such as titanium;

to widespread outcry from global manufacturers, the Chinese

government now restricts exports of rare-earth metals.) But the

most important reason his firm "just had to localize," says Li, is

the astonishing rise of local rivals.

Beyond Frugality

A decade ago, the American med-tech sector towered over all

others and China's was of little relevance. But by the reckoning

of PricewaterhouseCoopers (PWC) , the U.S. lead will suffer on

every important innovation metric in this industry over the next

decade, while emerging giants will start catching up. China, in

particular, could become a bigger force in this sector than Europe

as of 2020-by both creating and consuming med-tech

innovations.

First, to creation. For example, says Christopher Wasden of

PWC, the traditional approach taken by big multinationals to

sutures is to sell disposable versions on the cheap-razor/costly

blade business model. But, he observes, local rivals beat them by

developing reusable sutures, a frugal and less wasteful option that

appealed to local sensibilities and pocketbooks. The local

takeover of the market for heart stents is another straw in the

wind. Not so long ago, says Li, Western firms such as his thought

their dominant market position was unassailable. When Microport

came out with products that were 40 percent cheaper, he recalls,

doctors were initially skeptical. �But they did hundreds of clinical

trials and now they own 70 percent of the Chinese market!" he

exclaims.

Similar tales are unfolding in other parts of the industry, and

investors are taking note. Microport and Lepu Medical, another

local rival in the stent market, have both had successful public

placements (the former on the Hong Kong market and the latter

on the Shenzhen market). Mindray Medical, which makes

inexpensive patient monitors and related equipment, is listed on

the New York Stock Exchange; it has substantial exports into

developed markets already. Trauson, a local firm specializing in

orthopedics, went public on the Hong Kong Exchange.

Not in My Backyard

Consider consumption next. China's med-tech market is forecast

to grow 15 percent a year to 2015, reaching $43 billion by 2019;

India's is galloping at 23 percent and should top $ 1 0 billion by

the decade's end. And China is now spending $ 125 billion in a

massive push to expand health care outside the major cities. That

creates vast new markets for inexpensive medical technologies.

The dual-track strategy taken by Philips, a Dutch

multinational, confirms that there are really two Chinas: one

fancy and one frugal. Ronald de jong of Philips reveals that his

firm now sells more high-end CT scanners in China each year

than it does in the United States. But, mindful of China's big push

to expand health care into rural areas, Philips has also made

numerous local acquisitions. He says the chief benefit is not

access to cheap labor but rather access �to a culture of frugality."

Omar Ishrak, a senior executive at GE for many years, argues

that the term "frugal innovation" underplays the revolution at

work, as price is only one advantage. The local innovation

approach often leapfrogs to the latest technologies, be it

miniaturization or mobile communications or advanced materials,

that produce devices both cheaper and better than rich-country

models. He points to GE's locally developed Brivo line of MRI

and CT machines, which provide "just what is needed. "

All impressive stuff, but this is not to say that Chinese firms

are about to take over the med-tech world tomorrow. For one

thing, points out Rajesh Parekh of McKinsey. local firms do well

only in less-complex and noninvasive fields such as imaging and

engineering; they have yet to penetrate highly risky and

sophisticated markets such as those for implanted defibrillators.

What is more, says Rachel Lee of the Boston Consulting Group,

the in-country laboratories set up by foreign firms are doing better

at cutting-edge research than are the local rivals, who are focused

on development. That suggests the Western giants may have a

few years in which they can master frugal innovation overseas

and bring home those lessons before the eventual but inevitable

Asian assault.

Will the storied multinationals really dance to a new tune? The

Western med-tech firms vigorously insist they are already doing

this and trot out a few colorful examples of frugalista products

they offer in rich countries. Scrutinize their claims, though, and it

becomes clear that this-thus far, at least-is a mere trickle.

This is extremely shortsighted, for the sort of frugal

innovation now bubbling up in China could yet save American

health care. That may seem an extraordinary claim, given that the

United States remains the Goliath of the $350 billion medical

technology industry. American med-tech firms, historically the

world's most innovative, still make up thirty-two of forty-six

firms in this sector with annual sales over $ 1 billion. And their

home market still accounts for some 40 percent of global sales.

It is to their credit that the Western giants have responded to

Asia's rise by investing furiously in those booming emerging

markets, and they clearly are learning useful tricks from the

thrifty natives. What the giants are reluctant to do is to bring

those cheap and cheerful technologies back into developed

markets. But that is precisely the dose of competition that bloated

health systems such as America's really need.

Disruption Ahead

To be fair, there are several obstacles to frugal innovations

entering the United States that must be swept aside. One is red

tape. Since a safety scandal led to the withdrawal in 2004 of

Vioxx, a blockbuster painkiller made by Merck, the FDA has

grown excessively risk averse. It now often takes twice as long

for firms to get new medical technologies approved in the United

States than it does in Europe. This discourages upstarts, as they

typically lack the army of regulatory experts and deep pockets

required to navigate the tricky FDA process.

Another needless barrier holding back the tide of cost savings

is the convoluted system of health care payments in the United

States. It is not enough for a clever device to be safe and

economical. To succeed in the United States it must also be

blessed by the official Centers for Medicare and Medicaid

Services (CMS). But getting a CMS payment code can take years

-again, cosseting the incumbents who drove costs up in the first

place.

That points to the most self-interested obstacle-the big

Western firms themselves. It's true that they are not in a

defensive crouch the way Detroit's carmakers were when

confronted by the rise of Asia's car industry several decades ago.

But firms such as CE, Philips, and Medtronic are not rushing to

sell their frugal inventions back in the United States or Europe.

Part of the explanation is structural: salespeople operating on

commission and distributors set up to peddle scanners costing

$100,000 or more do not know (and do not want to know) how to

hawk portable versions costing just $ 1 0,000 or even $ 1 ,000. The

bigger obstacle, confesses one senior executive, is the belief that

customers in the United States simply "have more ability to pay."

A disarmingly honest Omar Ishrak explains that America's

risk-averse regulators and its complex payment system are a

problem, but he offers that "manufacturers are also to blame."

The sales and distribution systems at firms such as CE, set up to

sell $ 1 00,000 scanners, are not suited to sell versions at a tenth

that price. And, he confesses, manufacturers "do not present

comprehensive evidence of value" before the sale; rather, he

thinks, they rely on "an emotional kind of sale."

That may have worked in the past, but as health budgets get

squeezed in the West and cost-effective technologies emerge

from the East. emotion will surely yield to economics in time.

History suggests that this strategy will ultimately fail, as the

eventual assault of well-engineered, affordable Japanese cars

taught Detroit's carmakers-and that Western consumers should

welcome the newcomers with open arms. Jeffrey Immelt, GE's

chairman, coauthored a case study published by the Harvard

Basiness Review in 2009 describing the challenges and ultimate

triumphs encountered by the dynamic Ishrak, then a rising star at

his firm, in developing health care innovations in Asia. In

mid-201 1 . the GE boss was challenged with this question: what

about Ishrak's confession that GE's own sales and commission

structures greatly hindered the flow of frugal innovations to

markets such as the United States? Immelt laughed and revealed

that on that very day, Medtronic had poached Ishrak to be its new

chief executive. As for GE, he accepted the critique: "We're just

going to have to find another way to pay our salesmen."

That is a sobering insight, especially for those concerned

about the middle class squeeze-the subject of the next chapter.

But if American firms do not eat their own lunch (Silicon Valley

jargon for replacing one's own business model with a better one),

Asia's rising stars of med-tech will do it soon enough.

Technology is advancing at such a breathtaking pace that

innovation simply can no longer be suppressed by cozy

multinationals keen on milking their assets. That's why the only

real question left is whether the frugal innovators that will come

out on top will use forks or chopsticks.

3

Of Stagnation and Rejuvenation

Today's innovation revolution is making the wOlld a

wealthier and better place in many ways. So why is it that

many ordinary people in developed countIies feel that their

lives are getting worse? There is even a chams of experts

now arguing that the children bom today may be the first

generation of Americans to be worse off than their parents.

The explanation for this malaise, which was evident

even before the recent financial crisis, is the middle-class

squeeze. Thanks to the forces of globalization and

Googlizat ion, the elites of Mwnba i now Jead lives as good

as or better than those enjoyed by the elites of Manhattan

and Munich. With the trans[Olwative power of mobile

telephony and microfinance, rural women in Rwanda and

slum dwellers in Sao Paulo 's favelas now have economic

opportunities unimaginable just a decade ago. But what

about Kansas?

The disraptive forces ovel1urning the old economic

order are creating enormous opportunities, but many in the

straggling middle classes are not benefiting. There are

various explanations for this trend, but it is at least in part

because even educated, white-collar wOlkers in many lich

countries lack the skills to capitalize on those

oppol1lmities. As the broad middle of the developed world

watches elites capture much of the gain from the new

global ordel� anger and resentment are growing. Unless

leaders from both the public and private sectors take steps

to widen access to the economic opportunities made

possible by the Great Dismption, a dangerous backlash

against globalization, immigration, and innovation looks to

be in the cards.

The critics of today's economic transformation are

right in suggesting that there is an indefensible inequity in

how the fruits of revolution are being shared. There is even

evidence to suppOI1 the assel1ion that the United States,

long the most dynamic big economy in the wOlld, may be

headed for stagnation. Howevel� it is wrong to suggest that

such a decline is inevitable or that the disruptive forces

behind the global economic rise of recent decades have mn

out of steam.

The good news is that the new economics of innovation

points to a creative set of tools, rules, and social nOlms to

tackle this problem. The road from stagnation to

rejuvenation mns through innovation.

Arianna Huffington is an optimist in general and a big believer

in the future of the United States in particular. Growing up in

Athens, Greece, she walked past a statue of Harry Truman every

day and dreamed of moving to the land of opportunity. She had

the chance, at the age of sixteen, to spend the summer with

American families, and she loved it so much she vowed to come

back. When she did, in 1980, she came for good and made the

most of her opportunities. The flamboyant and witty migrant has

grown her Humngton Post into one of the only financially

successful online journals and has become an influential social

and political commentator. By any measure, the United States has

been good to her, and her faith in the country has been amply

rewarded.

So why is she now warning that her adopted homeland is on

its way to becoming a third-world country? The reason is simple.

She worries that the extraordinary economic squeeze that middle­

class Americans have experienced in recent years will tum the

country into a place with just two classes-the rich and

everybody else. That, after all, is how famously unequal societies

such as Brazil and India have long been (at least until the

remarkable rise of the middle classes in emerging markets of

late) . But now, she explains in Third World America, the warning

signs are unmissable: �Our industrial base is vanishing, taking

with it the kind of jobs that have formed the backbone of our

economy for more than a century; our education system is in

shambles, making it harder for tomorrow's workforce to acquire

the information and training it needs to land good twenty-first­

century jobs; our infrastructure-our roads, our bridges, our

sewage and water and transportation and electrical systems-is

crumbling. "

Huffington does not want to be a Cassandra. However, she

observes sadly, the other Greek woman sounding the alarm was

proved right, as the Trojans discovered to their detriment. And so

too may be this one, if U.S. leaders do not act. The confluence of

economic and political forces squeezing the middle class today in

developed countries, not just the United States, is all too real.

Huffington worries that the American dream of achieving a better

life for one's children through hard work and discipline is now in

peril. Though some dismiss any talk of a middle-class squeeze,

many on both sides of the political aisle share her concerns.

President Barack Obama declared in 2010 that "the class that

made the twentieth century the American century . . . has been

under assault for a long time." And Ronald Haskins, who served

as the senior White House advisor on welfare policy to President

George W. Bush, stated recently, "We've had a dramatic increase

in inequality in the country. There's no question about that. Some

people try to argue that point that it isn't true, and I think that,

you know, it's crazy for anybody to do that. Every data set that

I 'm aware of shows that there's huge, increased inequality."

Consider the evidence. The richest 1 percent of Americans

took home less than 9 percent of the country's income in the late

1970s. By 2007, the richest 1 percent took in 23.5 percent of total

national income. The last time income was that concentrated in

America was back in the 1920s. Rising inequality does not have

to translate automatically into a squeeze on the middle class, of

course: it is possible for the very rich to get much richer even as

the ordinary Joe makes a wee bit more. But in this case, the

squeeze was indeed on. The modest gains in income that average

American households saw in the years before the recent financial

crash were often more than wiped out in practice by soaring debt

payments, rising insurance premiums, out-of-pocket health care

charges, and other substantial increases in the cost of living. Alan

Greenspan, the former chairman of the Federal Reserve Board of

Governors, warned as far back as 2005, "This is not the type of

thing which a democratic society-a capitalist democratic SOCiety

-can really accept without addressing."

What is more, the squeeze is not a uniquely Yankee

phenomenon. Branko Milanovic, a World Bank economist, has

crunched the numbers on inequality in and among countries. He

makes the important observation that global income distribution

was actually made more equal by the extraordinary rise of India

and China in recent decades. Indeed. judged on a global scale. the

past few decades have produced something of a great leveling

across the world-which is surely to be applauded. However,

offsetting that were forces that led to greater inequality within

important countries. He points out that while the United States is

among the most unequal of developed countries, "inequality has

risen decisively in Western nations over the past twenty-five

years."

If that were the end of the story. it would be merely a moral

outrage. However, while some inequality in income is inevitable

and even desirable (most reasonable people will agree that hard

work and brilliance should be rewarded more generously than

sloth and stupidity), extreme inequality strains the social compact

and risks propelling societies into chaos. That is why the bigger

worry is the prospect of a backlash sparked by growing

inequality. as this could do much to harm the economic outlook

for everyone-including the struggling middle classes. There are

already signs that the stagnation and malaise seen in the United

States and other developed countries is fueling anti-immigration

and antitrade sentiments. If the engines of innovation that have

produced extraordinary global prosperity (albeit in inequitable

form) over the past few decades were to be gummed up by a halt

in the flow of ideas. people, and goods. then the result may well

be much slower economic growth or worse for all of society. And

history shows that the battle over how big a slice of pie one gets

becomes much uglier when the pie is shrinking rather than

growing.

The challenge of yawning income gaps within countries

threatens to undermine the innovation-driven transformation that

has done so much good for so many in the global economy. A

backlash is already under way in various countries, as seen in the

local resentments against job-grabbing immigrants, rapacious

capitalists, "socialist" big government, and other presumed

enemies of the middle class-as well as the global difficulties

encountered by the Doha round of trade liberalization and the

latest negotiations under the UN's Kyoto treaty on climate

change. Robert Reich, a former Clinton administration official

who is now at the University of California at Berkeley, argues

that change is coming, for good or ill: "The question is not

whether the pendulum will swing back. It surely will. The

question is how it will sWing-whether with reforms that widen

the circle of prosperity, or with demagoguery that turns America

away from the rest of the world, shrinks the economy, and sets

Americans against one another."

So what to do? Most of the explanations for the middle class

squeeze involve distributional arguments: yes, the pie is growing,

say critics, but greedy or well-connected elites are grabbing

unfairly large shares of that pie. There is certainly truth to this

argument, as Jacob Hacker and Paul Pierson show in their book

Winner-Take-All Politics. Whether it is by securing income tax

cuts that benefit mostly the very wealthy, lobbying for federal

funding for pork-barrel projects in favored industries, or keeping

in place tax breaks for employer-provided health care (which

subsidizes the privileged while forcing higher insurance rates and

out-of-pocket health costs on poorer working people), American

elites have clearly managed to gobble up an ever bigger piece of

the economic pie.

Indefensible as these are, at least such distributional problems

can be addressed by the political system, if and when the two

political parties in Washington decide to get serious about the

country's future. For example, one of the biggest reasons ordinary

families feel poorer is the fact that an ever-increasing share of

their monthly compensation (which, put simply, is a mix of cash

income and health benefits) is going to pay for rising health

premiums. Big business often huffs and puffs about health care

inflation, which is roaring at rates much higher than the overall

inflation rate for the economy, but here's the dirty little secret:

companies do not actually care too much about this issue. The

federal tax code allows them to write off the total compensation

paid to workers, regardless of the split between health benefits

and cash income. The sharp rise in health insurance costs in

recent years has not put individual companies (especially those in

sectors, such as retail, that do not face foreign competition) at

much of a competitive disadvantage. However, it has been a big

factor behind the stagnation in the level of inflation-adjusted

wages paid to the ordinary worker. That is why meaningful health

reforms, going beyond President Obama's recent efforts, that

check the inflation in health care costs could help alleviate the

middle-class squeeze.

This may seem difficult, but it is actually easier to carry out

such reforms, which rejigger how the economic pie is divided,

than it is to address another possible cause for the middle-class

squeeze: that the pie has stopped growing altogether.

Is the Low-Hanging Fruit Gone?

Tyler Cowen, an iconoclastic economist at George Mason

University, makes this much more disturbing argument in The

Great Stagnation, the most talked-about book on economics in

many years. Looking at shrinking real wages and weakening

purchasing power for ordinary Americans, he observes that

typical individuals in earlier generations saw a doubling of living

standards every few decades. Americans today, he argues, are

sinking into a great stagnation and must get ready for an era of

diminished expectations. The reason, he argues, is not just

because the elites are taking the biggest pieces of pie. It is, he

argues controversially, because the pie itself is no longer growing

as it used to. And, he adds for good measure, none of the tricks in

today's innovation tool kit described in this book will come to the

rescue of the current generation of middle-class families.

That is an astonishing claim, and one that is worth

scrutinizing. His central proposition is that the United States has

been �living off low-hanging fruit for at least three hundred

years." Whether this was cheap immigrant labor, free land

(though the Native Americans would bristle at that notion) , or

powerful new technologies, the country's economic rise can be

explained in large part by such gifts. Rates of economic growth in

the United States have slowed down since about 1970, he thinks,

because the benefits of the previous momentum were exhausted

before new sources of growth were discovered.

That assertion seems to fly in the face of conventional wisdom

and everyday experience, which suggest that the world is living

through an extraordinary economic boom fueled by new

information and communication technologies. After all, is this not

the age of the personal computer, the Internet, mobile telephony,

and other marvels that have done so much to improve lives and

propel economic growth? His stunning answer is no: � Apart from

the seemingly magical Internet, life in broad material terms isn't

so different from 1953." He argues that earlier technologies such

as electricity and railroads were much more transformative than

today's. The Internet, he claims, is a marvelous invention that has

dramatically improved the quality of people's lives-but, he

insists, it has yet to make much of a contribution to jobs,

productivity growth, or economic output. Many Internet products

are free and Internet firms profitless; even goliaths of the sector

such as Facebook and Groupon employ pitifully few people

compared, say, to the automobile industry a century ago. Worse

yet, he argues, these technologies will not do much to revive

growth or help ease the middle-class squeeze: �We are at a

technology plateau and the trees are more bare than we would

like to think." In short, innovation will not ride to the rescue

anytime soon.

What should one make of this extraordinary, if deeply

ciistrp.ssing. ::Issessmp.nt of thp. flltllrp.? Cowp.n is cp.rtHinly right

about a few things. The big Western economies could stay stuck

in a quagmire for some years even as developing economies

boom, for a couple of reasons. In the short term, the overhang of

the financial crisis will keep the middle class squeezed for a while

yet. High levels of unemployment and recessionary cutbacks

mean that lots of workers and factories are idle. It may be

difficult for many of those now unemployed to find new jobs, as

evidence suggests long-term unemployment leads to the

degradation of skills, creditworthiness, motivation, and

marketability. The OECD estimates that just closing this "output

gap" and putting the rich world back where it was before the

financial crisis, never mind put the great stagnation behind, could

take till 2015.

A longer-term factor is demographies. Most developed

economies are aging rapidly. so the supply of new workers is

about to decline just as the number of retirees (whose benefits are

usually paid for by working people) is about to surge. Unless

countries embrace more liberal policies on working-age

immigrants from developing countries, this will precipitate a

pension crisis and also lower the potential economic growth rate.

Other ways out of this problem would be for workers to toil until

later in life or for lots of new native-born workers to enter the

workforce after receiving a decent education, but those factors

seem unlikely to ease the squeeze soon. Any whisper of pushing

back the age of eligibility for Social Security or government

pensions prompts ugly public rows in the United States and

Europe, while the biggest potential pool of unpaid workers in

recent history-women-has already entered the workforce of

wealthy countries in droves over the past few decades.

In addition to battling those headwinds, the economies of the

developed world have a problem with productivity growth. This

matters for several reasons. First and foremost. it matters because

economic growth is driven by two chief factors: population and

productivity. In emerging economies, the first factor can play a

big role, as populations are often young and labor forces are

expanding rapidly. But that is unlikely in mature economies,

which tend to have stable and aging workforces. That is why in

the advanced world, improving productivity-that is, producing

ever more valuable goods and services with each unit of labor-is

the most powerful way to grow faster. The arrival of information

technology fueled a productivity boom in the late 1990s in the

United States, as did the wider adoption and diffusion throughout

the economy of related software and productivity tools in the

early 2000s. Europe also improved, but not nearly as much as the

United States, perhaps because its markets are less competitive.

So companies there invested less in improving services and

business processes in such sectors as retailing. The upshot is that

productivity growth was losing steam in developed countries

before the global financial debacle.

So Cowen is right to sound the alarm about the productivity

engine sputtering, as this engine is the closest thing governments

have to a silver bullet when it comes to revving up economic

growth and creating the good jobs that will end the middle-class

squeeze. But he goes further, postulating that no new productivity

miracle is in the offing. The 30 percent or so of workers that

benefit directly or indirectly from the rise of the Internet and

computing (be they Google software engineers and high-end

content providers, Geek Squad technicians who install high-tech

equipment in the homes of the technologically challenged, or

artists who design funky iPad cases) will thrive, he guesstimates,

while the rest of society will be relegated to an underclass that

will fall ever further behind.

Is he really right in suggesting that rapid productivity growth

will become impossibly difficult because the low hanging fruit is

gone? More to the pOint, is he right in arguing that today' s

remarkable innovation revolution will do little to ease the middle­

class squeeze anytime soon? Only time will tell for sure, but there

are good reasons to be more optimistic if-and this is a very big if

-governments take the right steps to kick-start growth and fuel

innovation.

The Only Silver Bullet

The New Yorker ran a lovely cartoon in 201 1 that captured

thousands of years of economic history in a snapshot. The artist

sketched a Stone Age scene, with a small family huddled together

around a big rock. The only material possession in Sight is a stick

held by a child. The father looks at his son and says somberly.

�When I was your age, things were exactly the way they are

now."

It is hard for people in the developed world to believe this, but

through almost all of mankind's history, economic stagnation was

the norm, not the exception. Until about three hundred years ago,

the per capita income of all but the very elite (think pharaohs and

kings) remained grindingly small. That is why the lives of sons

were remarkably similar to those of their fathers. But the

industrial revolution sparked a surge in economic growth that

raised living standards and disposable income dramatically.

Angus Maddison, an economic historian, has calculated that the

average European was four times richer in the middle of the

twentieth century as his counterpart was in the early part of the

nineteenth century. Revealingly, the average American got eight

times richer over that same period but-thanks to government

policies of the day that were hostile to the diffusion and adoption

of new technologies and ideas (in other words. the essence of

innovation)-the average Chinese person actually got poorer.

So could the past turn out to be prelude for the middle class?

First consider the notion that the days of rapid productivity

growth are gone. The McKinsey Global Institute (MGn has done

a detailed investigation of the matter. Asked if Cowen is right,

James Manyika, a director at MGI, replies yes and no. Without a

productivity boost, today's younger generation will see slower

increases in living standards. By his group's calculations,

Americans born in 1960 saw their GDP per head grow 2.5 times

by the age of forty; those born in 2000 can expect to see it grow

only 1 .6 times by that age on current trends. That is hardly

stagnation, but it is fair to say America may be entering an age of

diminished expectations unless productivity growth speeds up.

And that will not be easy: MGI estimates that U.S. productivity

growth needs to accelerate by nearly a third from current levels to

sustain past GDP growth rates over the next decade, assuming no

increase in labor inputs.

Nevertheless, there is reason to think productivity growth can

pick up. For one thing, the argument that there is no low-hanging

fruit may be wrong. The United States may have one of the most

efficient big economies in the world, but there are still plenty of

corners of inefficiency and waste. For example, health care

gobbles up some 18 percent of U.S. GOP, far and away more than

what any other rich country spends on this, but international

comparisons show that the country gets only mediocre health

outcomes. There is plenty of evidence that money is wasted,

inventions are needlessly gold-plated, and costs are merely

shifted around from one part of the sector to another. Similar

arguments can be made about the U.S. public education sector,

which is crying out for innovation and efficiency gains.

MGI has scrutinized the American economy and found that

there is �plenty of headroom" for future productivity

improvements. About three-quarters of those gains look to come

from the private sector, and a quarter from government and quasi­

public sectors such as health care. Even if Cowen is right that the

lowest-hanging fruit is gone, there are surely plenty of lowish

fruits that can be reached, albeit with a bit more effort. That

suggests the tree is not bare. What is more, the MGI work

debunks the perception held by some that productivity gains

inevitably come with massive job losses-an understandable

sentiment given the mass layoffs undertaken by employers during

the recent financial crisis under the guise of productivity

enhancement. The think tank looked back across the past century

and found that for every rolling ten-year period but one,

productivity improvement went hand in hand with rises in

employment.

Ah, but what about Cowen's bolder claim-that technology

has run out of steam and that innovation will not come to the

rescue of the United States anytime soon? If that were true, that

would cast doubt on the central arguments of this book: that the

world's grand challenges, as well as the middle-class squeeze,

could be tackled by a wave of socially useful innovation. One

pillar in his argument is his assessment that Internet companies,

which are giving many things away for free, are not producing

much economic value. That is a questionable assertion. While it is

true that lots of things appear free at the point of use-think of

Google searches or coupons from Groupon-in fact there is value

being created discreetly. The personal data that Google collects

from searches allow it to tailor its lucrative online advertising,

just as the "vapor trail" of data left by (mostly unwitting) users of

location-based services such as Foursquare allows such firms to

profile users and create data analytics that investors believe to be

hugely valuable. And this Big Data goldmine is unlikely to be

tapped out anytime soon: astonishingly, Google estimates that

some 15 percent of the search requests it receives every day are

new and unique.

Another pillar in Cowen's argument is that previous

revolutionary technologies have taken many decades to transform

societies, Since the Internet is relatively young, he argues, this

means that any big economic dividends are a long way off-and

therefore innovation will not save the middle class anytime soon.

He points to deep economic analysis done by Alexander Field in

A Great Leap FOlWard, a book that overturns conventional

wisdom by demonstrating that the decade that saw the greatest

productivity advance in the twentieth century was the 1930s.

(Previously, many argued that it was the wartime efforts at

resource mobilization that kick-started the golden economic era

of the 1950s and 1960s,) Field shows that during the Great

Depression, companies adopted dramatically better processes and

technologies that eventually led to such marvels as streamlined

cars with automatic transmissions, diesel locomotives, and a

world-beating film industry in Hollywood, The point about the

long cycles of innovation is surely right: invention often comes in

a fast and furious flurry, but the real economic gains are usually

realized only decades later as those inventions are adopted and

adapted throughout society,

But this argument ignores the fact that lots of money has been

invested in fields other than the Internet over the past few decades

and it is quite possible that those long-term investments will pay

dividends in the next decade or two. Bill Gates has little time for

talk of stagnation: �Bah-would you rather live in the 1950s7"

Thanks to those decades of investments in research and

development. Gates says. he sees extraordinary progress coming

soon in fields ranging from energy storage to advanced materials

to genomics. The first problem with the techno-pessimistic view,

he argues, is one of time horizons. If one speaks of just a few

years, the view may be right, but if one speaks of the long term, it

is surely wrong. he thinks. The second problem, he argues, has to

do with the inadequacy of metrics such as productivity and GDP,

which do not capture many ways in which technology is

improving lives. For example, how does one calculate how much

humanity's lot has improved because of the arrival of Wikipedia,

which puts more information into the hands of schoolchildren in

the world's poorest villages than the American president

commanded just a few decades ago? And. asks Gates

mischievously, "who changes flat tires anymore?"

Beyond Stagnation

This debate is likely to rage for some time yet. and eyes are sure

to glaze over as the economists and technologists clash, but here

is why everyone needs to pay attention. The concerns voiced

today by Tyler Cowen about the United States may soon ring true

for other countries too if governments fail to fix bad policies that

retard innovation and implement good ones that boost it (a topic

taken up by a later chapter, "The Sputnik Fallacies"). Even before

the financial crisis, Europe had a problem with productivity

growth worse than that of the United States, and Japan's lost

decade of economic malaise has already produced a lost

generation of youth. The Middle East desperately needs to create

new jobs too, if the hopes raised by the democratic uprisings of

the Arab Spring are not to be cruelly crushed: the World Bank

estimates that the region needs to create eighty million more jobs

by 2020 just to absorb new entrants into the labor pool without

loss of living standards. And even China, the source of much of

the dynamism in the world economy of late, will face a crisis in

time thanks to its one-child policy. Unlike India, which looks to

enjoy a �demographic dividend" as lots of young workers enter

the economy soon, China's workforce is aging and there are not

enough children to fill the void.

The surest path from stagnation to rejuvenation runs through

innovation. To see why, consider the lessons offered by the new

economics of innovation and "intangible" capital. In early 201 1 ,

Ben Bernanke, the current chairman of the Federal Reserve

Bank's Board of Governors, gave an important but little-noticed

speech at a conference at Georgetown University that sketched

out the relationship between innovation and growth: "Innovation

and technological change are undoubtedly central to the growth

process; over the past 200 years or so, innovation, technical

advances, and investment in capital goods embodying new

technologies have transformed economies around the world . . . in

addition, recent research has highlighted the important role

played by intangible capital, such as the knowledge embodied in

the workforce, business plans and practices, and brand names.

This research suggests that technological progress and the

accumulation of intangible capital have together accounted for

well over half of the increase in output per hour in the United

States during the past several decades."

Bernanke's praise for the role of innovation in sparking

economic growth heralds the triumph of the new economics of

innovation. Traditionally, economists did not think too much

about technology and its impacts on economic growth. That

began to change as research by a camp of economists, most

prominent among them MIT's Robert Solow (who later won a

Nobel Prize for this work) , suggested that technical progress

dwarfed the role played by labor and capital in determining

economic growth in modern economies. That laid the foundation

stone for new growth theory, an influential update on Solow's

work that was pioneered by Paul Romer, a longtime Stanford

economist who has recently moved to New York University. The

essence of this philosophy is the notion that the source of

economic progress is ideas.

That is a radical departure from classical economic thinking,

which focused on traditional means of production such as land,

labor, and capital. But research and elaborate calculations done

by economists in Romer's camp show that growth is driven not

merely by physical objects but mostly by smarter ways of

manipulating physical objects that create new goods and services

that satisfy society's unmet needs: in short, by innovation. As

Romer puts it, "The classical suggestion that we can grow rich by

accumulating more and more pieces of physical capital like

forklifts is simply wrong . . . any kind of physical capital is

ultimately subject to diminishing returns." In contrast, he

observes, knowledge is subject to increasing returns.

That is the essential insight of the age of innovation. Because

more than one person can make use of such knowledge-economy

goods as software at one time, such goods are tremendous drivers

of productivity. After all, though it may cost Microsoft hundreds

of millions of dollars to produce the first copy of a new software

program, it costs the firm next to nothing to produce the millionth

or billionth copy. Romer invokes the analogy of a kitchen to

explain his theory. Mixing inexpensive ingredients according to a

recipe creates valuable new dishes. Most people believe the limit

on growth is the number of ingredients available to cook

according to a given set of recipes. Ah, but if ingenious new chefs

devise better recipes, then society could generate more economic

value per unit of raw material.

The new economics of innovation offers a powerful rebuttal to

the notion that resource scarcity limits growth and dooms

mankind to stagnation. As Romer puts it: �Every generation has

perceived the limits to growth that finite resources and

undesirable side effects would pose if no new recipes or ideas

were discovered. And every generation has underestimated the

potential for finding new recipes and ideas. We consistently fail

to grasp how many ideas remain to be discovered. Possibilities do

not add up. They multiply."

This is not to say that innovation is easy, of course, or that the

current pace of progress is unprecedented. The great Victorian

age of invention brought the world many marvels, including the

telegraph, which lifted productivity at the time and laid the

foundations for progress in the century to follow. Hal Varian, the

chief economist at Google, has observed that technology changes,

�but economic laws do not." He notes that even in today's

Internet economy such age-old factors as inflation, business

cycles, profits, and monopolies all still matter.

Romer himself offers the most powerful note of caution. Ask

him about Cowen's thesis on the great stagnation, and he offers a

surprising response at first: �I agree with him that something big

has gone wrong in the United States since the 1970s." He agrees

productivity is not growing as fast as it should be, but he strongly

disagrees that the reason is the rate of arrival of new technologies.

Rather, he argues, the problem is rules: �New technologies absent

the right rules can be harmful." He pOints to the example of

fisheries, where new technologies in netting and trawlers have led

not to greater economic value or sustainable productivity gains

but to overfishing, declining stocks, and industrial decline. By

rules he means more than a static set of regulations or the rule of

law; his �rules" can range from bankruptcy codes to government

regulations to social norms around corruption. He insists they

need constantly to adapt to keep pace with changing technologies,

societal mores, and the effects of scale. Intellectual property is

another set of rules that influence the pace of innovation. Romer

acknowledges the importance of issuing patents as an incentive

for inventors, but argues that current rules may need to be

softened to allow for greater and more rapid dissemination of

ideas.

Societies that get these rules right will benefit more from the

invention and adoption of new technologies than will those with

rules that are distorted, perverse, or captured by elites. He

worries, for example, about the lobbying power of incumbent

industries to defend the status quo and win such perks as outsized

executive compensation. To help developing countries accelerate

their development process by leapfrogging to good rules, he is

now campaigning for special charter cities to be carved out of

developing countries. Some call it neocolonialism, but he insists

these newly created zones would operate independent of local

clites under the authority of benevolent foreign overlords

applying time-tested rules and good governance (rather as Britain

did in Hong Kong) . As for the malaise of the United States,

Romer believes that the wrong rules allowed such sectors as

health care and finance to suck in huge resources without

producing much value for society.

The rules that a society adopts influence not just the total

amount of effort that goes into innovation, he argues, but also the

types of problems that all this innovative effort is trying to solve:

�If some of the best minds of the current generation are spending

their time trying to figure out innovative ways to engage in rent­

seeking instead of creating value, human progress will suffer."

This is what happened as the financial sector in many Western

countries, most notably in the United States and Britain, became

increasingly disconnected from the real economy. The American

financial industry grew dramatically during the bubble years

preceding the recent crash, with its size soaring to historical highs

of nearly 8.5 percent of U.S. CDP; in 1990 it was under 6 percent

and in 1970 roughly 4 percent. But this growth was based on

illusory innovations and unsustainable gains, as the collapse later

revealed. Worse yet, there is some reason to think that the lure of

easy money on Wall Street sucked some of the brightest and most

enterprising people away from careers in other fields that have

traditionally produced socially useful innovation and

entrepreneurship.

That, in sum, is why innovation matters so much at the level

of the ordinary person. Today's middle-class squeeze is not just

the result of the Great Disruption of the global economy: it is also

the result of countries clinging to the wrong rules for encouraging

innovation and sharing its gains. The final section of the book

investigates what the right rules are by asking what governments,

companies, and individuals can do to encourage innovation in the

first place. But before turning to that question it makes sense to

consider, as the next section does, the dramatic ways in which

innovation itself is changing. After all, as Ben Bernanke pointed

out, it is intangibles such as the know-how inside the minds of

innovators that are increasingly driving innovation.

Part Two

Speed: Where Innovation Is Going

4

The Singularity and Its Discontents

The wOlJd is undelgoing an unprecedented demographic,

economic, and environmental trans[ol7nation today. The

rapid aging of the global population comesjust as mankind

has become a primalily urban species for the first time in

its histOlY. Adding to this mix, of course, is the forceful

alTivai of giant emerging markets onto the wOlld stage.

As a result, there is now a great race under way

between the forces of development and those of

degradation. The fate of people and the planet hangs in the

balance, and the outcome is not preordained. Even so,

society can tip the scales in favor of a positive outcome-iF

somehow mankind could find ways of accelerating the pace

of innovation directed toward the grand global challenges

(as opposed to, or at least in addition to, coming l1p with

yet another triple-decker bacon-taco bl1lgel).

But can we really speed up innovation in this way?

Actually, some of the wOlld's leading entrepreneurs and

thinkers-including leading lights of Silicon Valley-are

convinced that today's disruptions hera.ld the arrival of a

new golden age of innovation. This chapter descIibes the

quiet but powedul confluence of technologies accelerating

innovation today that could help tame the wOlld's most

wicked problems.

Some prognosticators claim these trends will inevitably

lead humanity to a glorious postbiological futl1re. and

pelhaps even to immortality. That seems fanciful, if not

absurd. But one does not have to believe such claims to

acknowledge that the convelgence of key technology

trends, in fields ranging from materials science to synthetic

genomics to artificial intelligence, is acCelelc'1ting global

innovation and speeding the global economy toward a

postindustIial world.

Thirty years ago, Julian Simon and Paul Ehrlich entered into a

famous bet. The former, a libertarian at the Cato Institute think

tank, was skeptical of the gloomy claims made by the latter, a

Stanford University ecologist best known for his predictions of

environmental chaos and human suffering resulting from gross

overpopulation. Thumbing his nose at such notions of resource

scarcity. Simon wagered that the price of any nve commodities

chosen by Ehrlich would go down in price over the following

decade. History shows that the supposed "population bomb" did

not explode. and the world did not, in fact, run out of resources.

Simon handily won the bet.

Ah. but that did not silence the nabobs of negativity. A

growing chorus of doom now argues that the world cannot

possibly feed ten billion mouths, that Africa is destined to fail,

and that the world is heading for an unavoidable climate calamity.

Those are genuine crises confronting the world, but is humanity's

fate really so gloomy?

Nonsense, argue the techno-optimists. Matt Ridley, a noted

British science writer, boldly predicts that in 2 1 10, a much bigger

world population could enjoy more and better food produced on

less land than is used by farming today-and even return lots of

farmland to wilderness. The key, he insists, is continued

technological progress.

Ami somp. think thp. floorlg::ltp.s ::IfP. ::Ihollt to opp.n on sllc:h

progress. Ray Kurzweil, an accomplished inventor and author of

The Singularity Is Near, argues that there is an unprecedented

confluence of disruptive technologies coming-in fields ranging

from communications to synthetic genomics-that will

dramatically improve the human condition. He even predicts that

machines will surpass humans in intelligence in a few decades

when the species will cross a momentous and irreversible point:

the Singularity. This will herald not a posthuman world, he

insists, but rather a postbiological one: � As we gradually learn to

harness the optimal computing capacity of matter, our

intelligence will spread through the universe at (or exceeding) the

speed of light, eventually leading to a sublime, universe-wide

awakening." Imperfect memories and extinguishable bodies will

then be beautifully augmented by spiritual machines that enhance

and prolong lives-perhaps. he dares to say, raising the prospect

of immortality.

Time even put the Singularity on its cover in early 201 1 ,

declaring in large letters that 2045 will be "the year that man

becomes immortal. * " Careful readers would have noticed the

asterisk, which offered caveats, but the flattering profile of

Kurzweil inside the magazine only reinforced the view that his

notions are to be taken seriously. To Kurzweil's claim of

immortality, the article's author added this additional eye­

catching promise: "So if computers are getting so much faster, so

incredibly fast . . . all that horsepower could be put in the service

of emulating whatever it is our brains are doing when they create

consciousness-not just doing arithmetic very qUickly or

composing piano music but also driving cars, writing books,

making ethical decisions, appreciating fancy paintings, making

witty observations at cocktail parties."

Shortly after that cover story came out, John Kelly, the head

of feseHfc:h Ht TRM. ciedHfeci thHt "we Hfe Ht H moment whefe

computers and computer technology now have approached

humans." That grand claim came on the eve of a major test of

computing prowess. His firm had shocked many back in 1997

when its Big Blue computer beat Garry Kasparov, a Russian

grandmaster, at chess. But winning at chess is a trivial task

compared to understanding the complexities and idiosyncrasies of

human speech.

So the firm developed Watson, a supercomputer it thinks is

capable of understanding natural language. To put this claim to

the test, the firm arranged for its creation to compete (without

accessing the Internet) on Jeopardy!, the television game show

known for using clever clues and coy wordplay that even humans

struggle to understand at times. In the contest, televised in late

February 201 1 , Watson trounced the two most successful

previuus champiuns uf [hal game un iLs way [u a cunvincing

victory.

One man who was not at all surprised by this was Kurzweil,

who has long predicted the rise of intelligent machines. It turns

out that he leads an influential cabal of techno-optimists-a group

that includes leading figures in Silicon Valley, scientific

grandees, and even the first chief information officer of the

Obama administration-that believes mankind is headed for a

glorious, postbiological era that will follow the Singularity. On

this view, humans will coevolve with machines until artificial

intelligence inevitably surpasses the human kind (by 2029, on his

calculation).

That is heady stuff, but what exactly is the Singularity? The

week that Time put Kurzweil on its cover, Wikipedia-the current

avatar of collective human insight-offered this reasonable

definition for the term, which is borrowed from astrophysics: "a

hypothetical event occurring when technological progress

becomes so rapid that it makes the future after the singularity

qualitatively different and harder to predict. Many of the most

recognized writers on the singularity, such as Vernor Vinge and

Ray Kurzweil, define the concept in terms of the technological

creation of super-intelligence, and allege that a postsingularity

world would be unpredictable to humans due to an inability of

human beings to imagine the intentions or capabilities of super­

intelligent entities."

Everyone knows about Moore's law, which holds that the

number of transistors that can be squeezed cheaply onto a

computer chip will double every eighteen months to two years.

This rule of thumb has held good for five decades, and thanks to a

confluence of technological advances, magically seems likely to

hold good for at least another couple of decades. Kurzweil's

journey as a futurist began when he examined the progress in

other realms of modern technology, and found that they too have

been quietly improving at such astonishing rates. Whether it is the

speed of microprocessors, the cost of computing power, the

volume of DNA sequencing, the growth in Internet connectivity,

or a host of other variables, he found the same explosive growth.

This law of accelerating returns, as it is known, underpins the

modern digital economy and provides the strongest scientific

support for his forecasts for the future. This idea of an ever-

expanding universe of opportunity is widely held in technology

circles. Kevin Kelly, a cofounder of Wired magazine and leading

technology futurist, agrees with Kurzweil on this rather radical

notion of increasing returns. In his book New Rules for a New

Economy, he argues that as the interconnectedness of people and

objects increases �the consequences of those connections

multiply out even faster, so that initial successes aren't self­

limiting, but self-feeding."

Dyslopians, Unile

Even in the heart of Silicon Valley, though, there are some who

are skeptical that these impressive trends actually add up to the

Singularity. The naysayers even dared to gather once inside the

Googleplex, the qUirky California headquarters of the search firm,

to ventilate their objections to this notion. At that private meeting

held in 2010, which included leading scientists and technologists

as well as science fiction writers, some argued that the movement

had become New Age kookery rather than serious science.

Geoffrey West, a theoretical physicist and former president of the

august Santa Fe Institute, has even publicly dismissed the

Singularity as complete "bullshit."

Other critics, such as Bill Joy, a cofounder of Sun

Microsystems, ::Igree with Kllrzweil ::!hollt the mpici technologic::!l

change to come, but warn that this could lead to a dystopia of

nanohots run amok and other techno-horrors. Eliezer Yudkowsky,

a theorist in the field of artificial intelligence (AI), has put the

danger this way: "The AI does not hate you, nor does it love you,

but you are made out of atoms which it can use for something

else." He and a band of like-minded futurists are working on

developing a first generation of AI creatures that are explicitly

friendly toward human beings, reasoning that they would get an

evolutionary head start on any malicious superintelligent

creatures that might follow.

Transcendent Man, a documentary released in 201 1 about

Kurzweil and his ideas, gave voice to a number of such critiques.

To his credit, Kurzweil has been open to criticism over the years.

Indeed. much of his recent writings has been devoted to

responding to challenges and to putting his earlier predictions to a

reality check. A recent essay on his website devotes some 150-

odd pages of analysis to weighing up his earlier predictions and

critiques of them, and argues that he got 78 percent of his

predictions right. Had he left it there, it might have persuaded

many fair-minded observers, but he could not resist adding that

�most of the rest was wrong only by time frame."

On the worrisome point about technology's unintended

dangers. he readily accepts that innovation can be a double-edged

sword-just look at man's taming of fire. he says. But he insists

that the risks, if properly managed. are more than outweighed by

the rewards-just as man's mastery of fire has brought us much

more gain than pain. He serves as an advisor to the American

government on bioterrorism (he has been honored by several

presidents for his innovations). and he acknowledges that a

biological attack by some rogue group is inevitable. The way

forward. he insists. is to develop rapid response systems to tackle

new threats much as global Internet SWAT teams now crush

nascent computer viruses as qUickly as they emerge. �The

Internet has never been taken down by such attacks-not even

once-and we can do the same for other threats," he insists.

That seems sensible enough, but push Kurzweil a bit more and

one reaches trickier terrain. In response to questions about the

religious implications of his confidence in science's ability to

extend human life indefinitely. Kurzweil provides the provocative

closing line of that documentary film: �Does God exist? I would

say not yet." That smacks of insufferable hubris, scoffs one critic.

who denounces him as a �pseudo-religious crackpot." One

renowned futurist who counts herself as Kurzweil's friend says,

�Ray's just having the world's most public midlife crisis."

Such notions send even techno-spiritualists such as Kevin

Kelly into fits. He thinks the Singularity vision is a useful

inspirational myth. but the God talk has him denouncing

Kurzweil as a "modern-day prophet" who simply gets it �wrong."

His magazine ran a damning critique of the Singularity notion

back in 2008, offering numerous scientific arguments to suggest

that superintelligence will prove far harder a nut to crack than

imagined by the Singularitarians: � An algorithm is only a set of

instructions, and even the most sophisticated machine executing

the most elaborate instructions is still an unconscious automaton.

Philosophy aside. a constellation of recent scientific findings

indicates that no matter how fast CPUs become in future decades,

they'll be no more aware than a toaster."

Ouch. Clearly. even the best-informed scientists still disagree

about the rate at which artificial intelligence will encroach on

human intelligence. Still, even if the bigger claims made for the

Singularity are not realized. there is good reason to think

Kurzweil is right in his most important argument: the world is

entering a period of accelerating global innovation. If these

efforts are directed at problems such as climate change and

chronic diseases, then it is just possible that the human condition

could improve dramatically this century. After all. that is

preCisely what happened over the twentieth century thanks to

such technological marvels as electrification and vaccination.

Hail, Homo Evolutis

But what if the biggest breakthroughs come in improving the

species itself? Some technology experts think humans might even

evolve into a fitter, stronger, smarter, and better-looking species

in coming decades-a mere blink of an eye in evolutionary terms.

�Forget the Singularity-biology will trump technology!" insists

Juan Enriquez, an author and biotechnology expert. Enriquez and

Steve Gullans argue in "Homo Evolutis," a striking essay, that the

breathtaking advances seen today in biotechnology, gene therapy,

epigenetics, proteomics, and myriad related fields are

turbocharging evolution itself. �The idea of a rapid evolution of

our species into a species that directly and deliberately gUides its

own evolution, and that of other species, is no longer completely

outlandish because it is not one technology, government,

company, region or discipline that is driving speciation."

They predict that this will force a rethink of politically correct

nostrums maintaining that all humans are created the same.

Instead, they posit that �a robust moral position embraces

diversity as one of humanity's greatest assets." As genomics

advances, for example, scientists are discovering that some

humans (often in some parts of the world) are born with the

ability to be superior sprinters, high-altitude climbers, and so on.

If one's rival in the Tour de France inherited such a genetic trait

through sheer dumb luck of parentage, is it really cheating if one

uses gene therapy to obtain such a trait (in a manner that cannot

be traced)? What if your child's classmate genetically inherited a

superior ability to do higher-order math or to master complex

languages and you had the chance to give your hardworking child

a painless treatment that would level the playing field?

As with Kurzweil's forecasts for machine superintelligence

and postbiological bodies, this argument raises hackles from

some in the scientific establishment. Even if the prognosticators

are wrong about the pace of change, though, they may turn out to

be right about the direction. What is more, any such

hyperevolution will raise uncomfortable questions about what it

means to be a human.

There is reason to think all of this talk about exponential

progress in technology and biology is not just the stuff of science

fantasy. The DECO, a research body not given to flights of fancy,

recently published a detailed look at trends in science and

technology. It argued that �converging trends in nanotechnology,

biotechnology, robotics and computing are creating

unprecedented capacities to manipulate nature. This is even

changing what ' natural' means." The agency's experts note that

the Korean government now has a robot ethics charter, and that a

study commissioned by the British armed forces concludes �an

implantable information chip could be wired directly into the

human user's brain by 2035 . . . in the longer term, technology

convergence may permit enhancement of healthy people."

William Nordhaus, a Yale economist, has analyzed

productivity growth in computing over time. He observes that

there has been a phenomenal increase in computing power over

the past century. Depending on the standard used, it has

skyrocketed since the days of manual computing by a factor of

1 . 7 trillion to 76 trillion. Looking to the future, he observes that

�aside from humans, computers and software are the ultimate

general purpose technology . . . with the potential for penetrating

and fundamentally changing virtually every corner of economic

life." At current rates of improvement, he says provocatively,

computers are approaching the complexity and computational

capacity of the human brain.

The DECO's Andrew Wyckoff points out why this matters so

much in an age of wicked problems. While governance and other

underlying factors matter greatly, he argues that technological

innovation can and must play a critical role in tackling thorny

societal challenges. For example, the 2030 Water Resources

Group, an independent nongovernmental outfit, has estimated,

based on current trends, that in two decades the world's thirst for

fresh water will exceed likely supply by 40 percent. Better end­

use efficiency of the sort already seen in some parts of the

agricultural and industrial sectors could help, as would new

supply infrastructure, but a big shortfall still seems likely.

New technologies can help close that gap: "The outputs of

biotechnology research [such as genetically modified crops] are

helping to meet the challenge of doubling food production

sustainably by 2050 while using approximately the same area of

arable land, fewer resources (particularly fossil fuel, water and

nitrogen), and at the same time mitigating climate change."

Though the technology for genetic modification of crops is

denounced by environmentalists, it is estimated to have delivered

net economic benefits in 2008 of $9.2 billion, evenly split

between farmers in the rich world and the poor world.

Such a level-headed endorsement of today's technology

revolution should make clear that the world stands on the cusp of

a new golden age for innovation. After all, it is precisely such a

culture of continuous improvement-which began in earnest with

the industrial revolution and which promises to speed up yet

again if Kurzweil's predictions of a new postindustrial revolution

are correct-that explains the astonishing improvements in the

human condition over time. It is easy to forget that the twentieth

century marked a period of unprecedented economic growth that

lifted masses of people out of abject poverty. It also brought

technological marvels such as modern pharmaceuticals and other

advances in public health that tackled many preventable diseases.

The result has been a great enhancement of human welfare and

longer, better lives for most people living in most places on earth.

But of course the twentieth century's advances did not solve

all of the world's problems-and there are plenty of new, twenty­

first-century global challenges now confronting humanity,

Mindful that market forces may not necessarily direct the coming

innovation revolution at those wicked problems, Kurzweil has

decided to help forge the future, With help from the founders of

Google and other Internet-age figures, he launched Singularity

University in 2009. This remarkable interdisciplinary institute,

housed on a NASA campus near Silicon Valley, aims to chum out

inventors. entrepreneurs. and investors who will tap into

tomorrow's disruptive technology trends to take on such

problems as water scarcity. neglected tropical diseases, and

climate change. Every summer, the school takes in several dozen

extremely bright, entrepreneurially minded students for its

accelerated graduate program. The students are dynamos from a

variety of backgrounds and geographies, and they are exposed to

some of the world's leading technologists with the aim of

accomplishing "ten to the ninth plus": coming up with

technology-based solutions to big problems that will positively

impact at least a billion people within ten years.

"We need to be more ambitious in taking on the world's grand

challenges ! " So declares Peter Diamandis, the dynamic force

behind the X Prize Foundation (a charity that aims to kick-start

innovation in areas such as clean energy and space travel by

sponsoring incentive prizes, a topic covered in the next chapter)

and a cofounder of Singularity University. The aim of the

institution, he explains, is to open the eyes of the world's best and

brightest to the leapfrogs made possible by exponentially

advancing innovation. and to instill a passion to change the world.

He shares Kurzweil's belief that humanity is on the verge of a

knowledge explosion. For almost all of history. he argues,

humans toiled in ignorance. But since the industrial revolution,

science and technology have advanced and the human condition

has improved dramatically. And we are just scratching the surface

of what is possible, he insists, if only we dare to dream: "Humans

have advanced rapidly for just a hundred of our 100,000 years on

earth-we still know nothing! "

A Very Sexy Idea

Whenever one hears extraordinary claims being made, it is only

right to be a bit skeptical. History provides lots of examples of

technological marvels supposedly just round the corner-jetpacks

for everyone!-that somehow fail to materialize. And even linear

trends, never mind exponential ones, rarely continue forever.

Rather, technological progress has often come in fits and starts,

with dramatic leaps forward for a while and then a bit of wheel

spinning while inventions diffuse slowly through the economy.

This happens because once in a while some promising set of

technologies attracts so much attention and money that it leaps

forward. This happened with the space program thanks to the

Apollo moon shot and nuclear science thanks to the Manhattan

Project, and with computers and the Internet thanks to the

investment capital that poured into this area before and after the

bursting of the great technology bubble a decade ago.

So merely pointing to impressive growth trends today does not

prove that technology will continue to improve in a reliably

dramatic fashion. It may not. Even so, there is a deeper reason to

share in the techno-optimists' view of the future: the evolutionary

basis for innovation. Humans are the only species capable of

breakthrough innovation. Some other animals do use tools, and

some ants do specialize at certain tasks. But these skills are not

cumulative, and the animals in question do not improve their

technologies generation after generation. Only humans innovate

continuously and cleverly.

Why should that be? Some have suggested that perhaps

something about the chemistry of big brains leads us to tinker.

Others have suggested that mastery of language or the capacity

for imitation and social learning hold the key. Matt Ridley, a

zoologist by training, believes the explanation lies not within the

human brain but outside: innovation is a social phenomenon. In

The Rational Optimist, he argues cheekily that the way the human

collective brain grows is by "ideas having sex."

This theory is, in a way, the offspring that would result if the

ideas of Charles Darwin could somehow have mated with those

of Adam Smith. On this view, trade is the spark that lit the fire of

human imagination, as it made possible not only the exchange of

goods but also the exchange of ideas. Trade also encouraged

specialization, since it rewarded individuals and communities to

focus on areas of comparative advantage. And such specialists­

in contrast with their generalist rivals or ancestors-had the time

and the incentive to develop better methods and technologies to

do tasks.

Through most of history, most people lived lives of quiet

desperation, humiliating servitude, and grinding poverty. And yet,

despite the pessimistic proclamations of Paul Ehrlich and many

other pundits, economic growth and technological progress have

come to the rescue time and again. Ample statistical evidence

shows that life has indeed gotten better for most people in most

places on most metrics. Whether one measures air and water

pollution in California, vaccination rates in Bangladesh, or life

expectancy in Japan, this conclusion is indisputable. Rising

incomes played a big role in this, but even more credit must go to

innovation. So argues Charles Kenny of the Center for Global

Development in Getting Better. "The biggest success of

development has not been making people richer but, rather, has

been making the things that really matter-things like health and

education-cheaper and more widely available. It is the invention

and spread of technology and ideas that have, literally, reduced

the cost of living."

The reason Ehrlich and the related Club of Rome camp of

thinkers got it wrong several decades ago was because they saw

worrisome trends and forecast linearly to doomsday. But such a

view ignores the role of feedback loops and market responses,

which inevitably lead to the robust interplay of scarcity. price

signals, substitution, investment, invention, and diffusion. Once

innovation is taken into account, development turns out to be a

dynamic dance. And now, mankind has the chance to build on

that insight in this new century as it takes on poverty, neglected

and chronic diseases, climate change, and other grand global

challenges.

What is most exciting about the Singularity vision is this: the

hard evidence and exponential technology trends on which its

extrapolations are based suggest that the current heated pace of

global innovation is not only going to continue but may well

accelerate dramatically in coming years. Asked if he thought the

wave of technological progress brought by the Internet revolution

was cresting, Bill Gates responds animatedly: � Absolutely not !"

It is hard to offer precise measurements, he notes, but the pace

of technological change is more rapid today than at any point in

history with the exception of perhaps the Victorian age of

invention. What is more, he insists, there is no plateau in sight.

Gates believes huge advances are coming in fields ranging from

advanced computer modeling and materials science to

communications and agricultural technologies that suggest even

better days may lie ahead. When one takes into account the

radical ways that innovation itself is being innovated, as the next

section on open innovation explains, his big claim actually seems

quite plausible. As Paul Saffo, a forecaster of large-scale change

at Discern Analytics, observes wisely: "Change is never linear.

Our expectations are linear, but new technologies come in S

curves, so we routinely overestimate short-term change and

underestimate long-term change." Never mistake a clear view for

a short distance, he adds.

In the end, it seems pretty plain that the global pace of

innovation is picking up today. That is the broad trend that

underpins many of the other trends described in this book,

especially the breathtaking move toward open innovation

described in the next chapter. As the speed of change picks up, it

will inevitably disrupt many lives and business models even as it

creates huge new opportunities for improving lifestyles and

cultivating economic growth. If enough entrepreneurs seize upon

exponential technologies to come up with novel solutions to

wicked problems, then today's accelerating pace of innovation

could even usher in a brighter future for humanity.

On this view, the future looks bright. Still, some are taking no

chances. In his final Jeopardy! answer, one of the human

contestants conceded defeat to IBM's supercomputer by

scribbling a cheeky line from The Simpsons: "I, for one, welcome

our new computer overlords." One hopes that Watson was

amused.

5

So Long, Silo

Thanks to the democratization of innovation, the smartest

people in your business don 'f woIf for you any longer.

That, in a nutshell, explains the big move toward open and

netwOlked models of innovation at companies, nonprofits,

and even governments today.

This trend promises many benefits, but caution is in

order. Firms that embrace user-driven models of

development risk being led down the garden trail of gold­

plating offerings for the best customers, a classic trap that

leaves an incumbent exposed to dismption by cheaper

innovators. Crowdsourcing has produced such marvels as

Wikipedia and Linux, but there is evidence that it can tap

the mediocrity and stapidity of crowds, not just their

wisdom. And incentive prizes, while genera.lly an efflcient

way to encourage open innovation, wOlk well only for

cel1ain types of problems.

Smart innovators shoald embrace open methods with

gusto bat keep a sharp lookout for potential pitfalls.

Berkeley seems like a fitting place to find the godfather of the

open innovation movement basking in glory. The California city

was, after all, at the very heart of the antiestablishment movement

of the 1960s and has spawned plenty of radical thinkers. One

recent sunny day not too long ago, Henry Chesbrough, a

professor at the Haas Business School at the University of

California at Berkeley, observed with a smile that "this is the

fortieth anniversary of the Summer of Love."

Chesbrough's three books-Open Innovation, Open Basiness

Models, and Open Services Innovation-have popularized the

notion of looking for bright ideas outside of an organization.

Firms are increasingly accomplishing this using several

approaches. One way that firms, and even governments, can do

this is by offering incentive prizes to those that solve speCific

challenges. Another approach is by using crowdsourcing. which

leads firms to cast a wide net among a group-say, regular

customers, or the public at large-to fish for bright ideas.

Although these approaches are showing great promise, as the

latter half of this chapter demonstrates, they deal only with the

idea-generation part of the innovation process. Some firms are

going much further by leaVing behind their inward-looking, top­

down innovation processes altogether.

As the concept of open innovation has become ever more

fashionable, the corporate R&D lab has become ever less

relevant. Studies show that many of the ideas that tum into

successful products and services no longer come from there. To

see why, travel to Cincinnati, Ohio-which is about as far

removed culturally from Berkeley as one can get in the United

States. This conservative midwestern city is home to Procter &

Gamble, historically one of the most traditional firms in the

country. For decades, the company that brought the world Ivory

soap, Crest toothpaste, and Tide laundry detergent had a closed

innovation process centered around its own secretive R&D

operations.

No longer. P&G has radically altered the way it comes up with

new ideas and products. It now welcomes and works with

universities, suppliers, and outside inventors. It also offers them a

share in the rewards. In less than a decade, P&G has increased the

proportion of new�product ideas originating from outside of the

firm from less than a fifth to around half. That has boosted

innovation and, says its respected former boss, A. G. Lafley, is

the main reason why P&G has been able to lift its long-term

growth rate and boost its profits and flagging share price.

Why did the firm make the switch to an open approach, a

risky move given the firm's centralized and successful past?

Simply put, Lafley saw the writing on the wall. The firm's tight

network of global innovation laboratories were simply not nimble

enough to keep pace with the times. For one thing, multinationals

such as P&G have grown so big that they need to keep generating

enormous amounts of organic growth just to keep pace, which

puts additional pressure on internal innovation labs that simply

cannot keep up. By 2000, it became clear to Lafley that internal

research productivity was stagnating even as the costs of

innovation were soaring, thanks to the explosion of new

technologies. Worse yet, globalization meant that markets were

much more competitive than before.

The only way forward, the firm decided, was to embrace an

outside-in strategy it calls Connect + Develop. Larry Huston and

Nabil Sakkab, then senior innovation figures at P&G, put it this

way in a seminal article published back in 2006: for every

researcher inside the company, they calculated, the

democratization of innovation meant there were two hundred just

as good outside the firm. They also saw that the most important

innovations were increasingly emerging from small and medium­

size firms and even individual entrepreneurs, not from big

research labs.

So the firm took the plunge. It opened its arms to outside

innovators and frowned on the �not invented here" attitude

common at research labs. It invited researchers from Los Alamos

National Laboratory, German chemical company BASF, and

other firms to sit in on the meetings of its once-secretive research

advisory groups. The company invested in a number of novel

efforts at open innovation, such as Yet2.com (an exchange for

intellectual property) and YourEncore (a network for retired

experts). It placed dozens of challenges on InnoCentive, the

pioneering online platform that runs prize competitions matching

firms struggling with technical problems with a wide array of

clever "solvers" from around the world.

The progress has not always been even, but the results have

been impressive. In the years following the launch of the scheme,

research productivity shot up dramatically. The firm's innovation

success rate-as measured by successful market entry of new

products-doubled, even as its costs of innovation declined.

Scouring the globe for "adjacent products" and tapping the

distributed genius of the firm's network of suppliers Oust the top

fifteen suppliers employ some fifty thousand researchers, for

example) has produced some dramatic winners. Mr. Clean Magic

Eraser, a blockbuster product, was licensed from BASF, while the

Swiffer Duster, another hugely successful cleaning product, was

adapted from a product invented by Japan's Unicharm

Corporation.

Not satisfied, the firm has now redoubled its efforts. It has set

up a disruptive-innovation college, and expanded its program of

sharing people with noncompeting firms. In 2008, for example,

P&G and Google swapped two dozen employees for a few weeks;

the marketer wanted more online experience, while the search

firm wanted to learn about building brands. It expanded its

Connect + Develop efforts, and now aims to triple the plan's

contribution to innovation development (which means getting $3

billion of its annual sales growth from outsiders). As a result of

all this, half of its innovation efforts meet profit and revenue

targets, whereas back in 2000 only 15 percent did. The company

projects that the typical new initiative in 2014 and 2015 will have

nearly twice the revenue as those of 201 1 . Most impressively, it

has managed to triple its innovation success rate. If it is able to

sustain such improvements, it may justify the claim made by

Huston and Sakkab that open innovation will become the

dominant innovation model for this century-and that "for most

companies, the alternative invent-it-ourselves model is a sure path

to diminishing returns. "

IBM is another iconic firm that has jumped on the open

innovation bandwagon. The once-secretive company has done a

sharp U-turn and embraced Linux, an open-source software

language. IBM now gushes about being part of the open

innovation community, yielding hundreds of software patents to

the creative commons rather than registering them for itself.

However, it also continues to take out patents at a record pace in

other areas, such as advanced materials, and in the process racks

up some $ 1 billion a year in licensing fees.

Since an army of programmers around the world work on

developing Linux, essentially at no cost, IBM now has an

extremely cheap and robust operating system. It makes money by

providing its clients with services that support the use of Linux­

and charging them for it. Using open-source software saves IBM

a whopping $400 million a year, according to Paul Hom, the

firm's former head of research. The company is so committed to

openness that it now carries out occasional online jam sessions

during which many thousands of its employees exchange ideas in

a mass form of brainstorming. The largest one was its Innovation

Jam in 2006, which involved 150,000 people from more than a

hundred countries and sixty-seven companies, and it led directly

to the launch of ten new businesses seeded with an initial total

investment of $ 100 million. As a result of all this, IBM now

makes more money from innovative, outward-facing services

(which are used even by its rivals) than from traditional business

lines.

Chesbrough, of course, heartily approves. He reckons that

�IBM and P&G have timed their shift to a high-volume open­

business model very well" and that if their competitors do not do

the same, they will be in trouble. And dozens of firms ranging

from Clorox, a household products firm, to Air Products, an

industrial gases company, are, in fact, now moving toward open

innovation. Kimberly-Clark, which sells paper products, cut its

time to market with new products by almost a third using open

innovation. Thanks to help from an outside collaborator, it was

able to bring SunSignals, a wearable product that alerts the user

when she is getting sunburned and needs to reapply sunscreen, to

market in just six months.

Xerox's PARC laboratory in Palo Alto was long the archetype

of the vertically integrated model of research, but the firm has

recently gone the other way with a new open innovation center in

Chennai, India. Usually when firms open research labs overseas,

they spend lots of money on fancy equipment and hire hundreds

of researchers that end up as part of its secretive global web

reporting back to corporate headquarters. In contrast, what Xerox

is doing is hiring a handful of �connectors" in India who are there

to scan the local horizon for potential partners. Sophie

Vandebroek, the firm's chief technology officer, explains that

�every person we hire will partner with at least fifty or more

people, "

From Ivory Tower to People Power

Open innovation was not always the rage. A few decades ago,

notes Chesbrough, corporate strategy gurus such as Michael

Porter of Harvard Business School were advising companies to

invest heavily in in-house corporate research and development as

a competitive edge against their rivals. Either offer a cheaper

product or invest and innovate to come up with differentiated

offerings, went the mantra. In that era, a key metric of a firm's

health and innovativeness was the percentage of its sales that it

plowed back into research and development. This was the heyday

of such legendary corporate research labs as Xerox PARC and

AT&T's Bell Labs, which produced many brilliant academic

papers and Nobel Prize winners. When Bill Joy, a cofounder of

Sun Microsystems, declared back in 1990 that �no matter who

you are, most of the smartest people work for someone else," he

was viewed as a radical.

Today, firms are rushing to pare back their in-house research

and beef up their open and networked innovation efforts. A big

reason for this is the fact that pouring ever more money into

yesterday's research model simply does not produce better

results. Analysis done by Booz & Company shows that "more

money is not connected to any better outcome." Every year the

firm scrutinizes the amount of money spent on R&D by hundreds

of leading firms, adjusting for the sector in which they compete,

and gauges whether there is any correlation with metrics such as

financial performance and market success. Spending nothing on

research is unwise, to be sure, as the firms in the bottom 10

percent of a sector do underperform. However, even allowing for

the fact that there are some minimum thresholds and benefits of

scale in R&D, Booz found year after year that the lavish spenders

do not get better performance.

Big-company bosses have figured out the bottom line: merely

pouring more money into in-house corporate labs does not equal

more innovation. In 198 1 , spending by firms with more than

twenty-five thousand employees made up some 70 percent of all

industrial R&D spending; by 2007, that had fallen to just 35

percent. Meanwhile, spending by firms with fewer than one

thousand employees shot up over that same period from a 4

percent share to 24 percent. Big firms and in-house R&D still

matter, as the overall spending by the big outfits did increase

fourfold to $95 billion in 2007. But if you want to see which way

the wind is blowing, consider the fact that R&D spending by

small firms shot up fiftyfold to $65 billion during that same

period. Barry Jaruzelski of Booz puts a sharp point on his firm's

number crunching: � AT&T actually didn't benefit much from that

Nobel-winning research back then, and today nobody has the

resources or capacity to do everything on their own.

Collaboration is a must."

That explains the big move in recent years toward

crowdsourcing, a term popularized by Jeff Howe of Wired

magazine. Back in 2006, he wrote an influential cover story on

the topic with this provocative passage: "Remember outsourcing?

Sending jobs to India and China is so 2003. The new pool of

cheap labor: everyday people using their spare cycles to create

content, solve problems, even do corporate R&D." In the years

since, everyone from marketers to aid workers to government

bureaucracies has jumped on this bandwagon.

How well has this especially sexy tool of open innovation

fared? The idea is not as new as its boosters would have you

believe. given that it builds on decades-old efforts at getting close

to customers. And it's hardly easy to do or risk-free. For those

organizations that have figured out how to use crowdsourcing

properly, though, it can produce spectacular results.

Get Ready for a Wild World

On a day in east London one recent summer, a warehouse was

taken over by a company eager to make a splash. It was decked

out to look like a cool New York loft. The Ministry of Sound, a

London nightclub, was hired for a party afterward. The event was

packed with journalists. At last the stars took to the stage. Alas, it

was not the latest British rock sensation-it was a group of

besuited Nokia executives there to announce a dramatic change in

corporate strategy.

Nokia, a Finnish company, makes mobile phone handsets that

are used by nearly a billion people around the world. However, it

now wants to be a services firm. Why? Niklas Savander, of

Nokia, argued that the mobile phone business "is moving so

rapidly. thanks to the democratization of the Internet, that we

must innovate or die." Providing people with devices alone is not

enough, the company has concluded.

With half of the value and most of the innovation in a mobile

phone handset now made up of software, "the leap to services is

not so great as it seems," he added. After extensive consultations

with its best customers, Nokia rolled out novel products offering

users networked gaming, music downloads, and other services

from their handsets. As customers became enthralled by the

ecosystem of services on offer, went the theory, they would in

turn co-create the next generation of innovations with the firm.

Visionary companies need to do even more than that, argued

C. K. Prahalad, the late business professor at the University of

Michigan who shot to fame with his theories about doing business

with the world' s poorest people. He argued that firms should

cultivate a network that includes consumers in which

�personalized, evolvable experiences are the goal, and products

and services evolve as a means to that end." That sounds like a

notion straight from the Summer of Love.

Yet despite the dangers, some companies have successfully

brought consumers and others from outside the firm's R&D labs

into the innovation process. Lego, the Danish maker of children's

building blocks, did it successfully. Inspired by research done at

MIT on how children learn, Lego launched Mindstorms, a

robotics kit that allows people to design their own robots and

other devices. Users-including many adults-have come up

with all sorts of ways of putting together the kit to make things

ranging from intruder alarms to sorting machines and even the

controls for small unmanned aircraft.

Eric von Hippel of MIT, author of the influential

Democratizing Innovation, has long advocated user-driven

innovation. He says you can see it all around you. Users who feel

passionate about certain products-a mountain bike, a kayak, or

even a car-often fiddle around with them because the products

fail to provide exactly what they want. He reckons open

innovation misses the point if it's not inspired by users, because

companies are then "just talking about a market for intellectual

property rights, it's still the old model."

Von Hippel thinks that firms close to their lead users can

come up with much better designs for new products and get them

to market faster. This advice appears to contradict what Clay

Christensen says (that listening to one's best customers leads

firms to gold-plate assets and grow vulnerable to disruptive

rivals), but in fact the two theses are compatible. Christensen's

point about disruptive innovation is that firms should not

uncritically cater to the demands of their most profitable current

customers. They must question those demands or they could end

up doing little more than gold-plating their current offerings; like

von Hippe!. he thinks firms should keep a closer watch on new

and dissatisfied users, who are much more likely to be the source

of disruptive ideas.

Invented on Facebook

Von Hippel adds that networks of hypercritical users can even

help firms qUickly filter out bad ideas and thus encourage the

process of fast failing. The craze for social networking sites such

as Facebook could be useful. Studies have shown that how people

relate to the products they use, something often discussed on such

sites, reveals social structure and preferences. That can help firms

understand more about their customers and how to market

products more effectively.

User networks operate in many businesses. OnStar, a mobile

information system widely launched by eM in 2000, was initially

meant only to proVide safety and emergency services for drivers.

But motorists wanted it to do more, and they pushed eM to

innovate. Now OnStar can check if a car is working properly,

open the doors for a driver who aCCidentally locks the keys inside,

shut off the engine if the auto is carjacked, and even locate the

nearest pizza place. eM believes OnStar helps to improve the

firm's brand loyalty because it keeps the company in constant

touch with its customers.

There is another compelling argument for firms to think hard

about recruiting users to speed up and improve their innovation

efforts. In rich countries much of the economic activity now

involves services, but profit margins are eroding.

Commoditization often occurs even faster in services than in

physical products: because innovations are easier to copy, patents

can provide less protection, up-front costs are lower, and product

cycles are shorter.

User-driven innovation is exciting, but the full-octane blend of

crowdsourcing involves all kinds of people. not just your best

customers. Its poster child is Wikipedia, the online encyclopedia

that has surpassed the Encyclopedia Britannica entirely through

crowdsourced efforts.

These approaches fall into several principal categories. Firms

can seek wisdom from the crowd: Quora does this by allowing

people to post questions that can be answered by anyone online,

with the best answers earning pOints or visibility. Firms can

create using the imagination of the crowd: an early example of

this was Threadless, a T-shirt manufacturer that gets its designs

by casting a wide net among nondesigners. Firms can also allow

the crowd to vote on things: eBay does this by allowing users to

rate the reliability of counterparties on the site, and Amazon does

this by allowing users to vote on which comments and reviews

were most useful. Firms can even use the crowd to do funding:

Marillion, a British band, led the way in the 1990s by getting fans

to underwrite an entire tour, while Kiva, a peer-to-peer lending

site, channels money from small lenders in rich countries to small

entrepreneurs in poor ones. Taken together, these approaches can

be an incredibly powerful way to tap into the distributed brain

cells of the global population.

Novartis, a Swiss pharmaceutical giant, has put its raw

scientific findings in the area of diabetes up on the Web for all to

see. This seems odd at first, given that pharmaceutical firms are

notoriously secretive about intellectual property rights and given

that the market for diabetes drugs is, unlike the ones for neglected

diseases afflicting only developing countries, hugely lucrative. It

did this not out of altruism, however, but because it grew

convinced that this field is so complicated that only a concerted

global push, aided by crowdsourcing, will speed solutions.

Because the firm still retains in-house knowledge of what all that

data means, Novartis believes it still has a valuable head start on

any rivals when the time comes to go for a patent or rush a drug

to market.

The incumbent firms in stodgy old-economy industries such as

cars and energy are reluctant to follow this trend, but newcomers

in those industries are jumping in. Local Motors is an American

start-up automobile manufacturer that crowdsources the designs

for its specialty vehicles. When Facebook came up with a radical

new way to make its servers much more energy efficient in early

201 1 , it made the blueprints available to all for free. That came as

a shock, for the energy efficiency of one's server farms is a key

competitive edge in this business. Google, for example, keeps its

green techniques quiet. Being much smaller, and without the

army of in-house engineers that the search giant has, Facebook

decided it could benefit more from any improvements made on its

designs by a global collective brain than it would by secrecy.

This is all pretty impressive, but a rather basic question seems

in order. How is it possible that so many people-presumably

some with day jobs and lives to lead-are now suddenly coming

together to solve other people's difficult problems? Clay Shirky, a

prominent technology commentator, argues that the key is the

�cognitive surplus" that he claims people have these days to work

on such projects. The shift to a postindustrial order gave most

people lots of free time and spare thinking capacity, he argues,

but until recently ordinary folk were not able to do much with it.

On this view, television sucked them into a passive stupor, and

for decades society wasted much of that theoretical cognitive

surplus. But now, thanks to the new tools of social media and the

latest iteration of Web and wireless technologies, people can

connect and develop other people's products, analyze public

health data in other people's cities, and send micropayments to

microfinance charities in other places such as Micronesia. Donald

Tapscott, coauthor with Anthony D. Williams of the provocative

book Wikinomics and its recent follow-up Macrowikinomics, even

makes the grand claim that mass collaboration with social

networking adds up to an entirely new mode of social production.

Beyond the Wisdom of Crowds

Through much of history, crowds were seen not as a fount of

wisdom but rather as a source of folly, radicalism, and even

bloodthirsty excess. Investing in the Dutch horticultural industry

or the Peruvian fertilizer trade are, taken at face value, reasonable

propositions. But as the madness of crowds took over, though,

wild-eyed speculation led to the infamous tulip and guano

financial bubbles.

In other cases, reasonable men and women have been shouted

down by zealots howling for blood, be they Puritans in witch­

hunting Salem, crusaders in the Holy Land, or democrats in the

French Reign of Terror. That explains why, for centuries, crowds

were regarded with suspicion. Charles MacKay captured the

excesses of the nineteenth century beautifully in his book

Extraordinary Popular Delusions and the Madness of Crowds:

�Men, it has been well said, think in herds. It will be seen that

they go mad in herds, while they only recover their senses slowly,

and one by one. "

Ah, but that was before the age of wikinomics. With the

triumph in the last decade of Internet commerce, ubiquitous

connectivity, and much more democratic access to information

about everything, a new theory began to take hold. Rather than

herd behavior, argued such heretics as the New YOlker's James

Surowiecki, what the new collective consciousness emerging on

the Web displayed was the wisdom of crowds. Thanks to the

Internet. this contrarian camp argues. a disparate bunch of

strangers can make more accurate decisions and predictions than

any single person or technical specialist. Just look, argue such

folk, at how successful this approach works online in everything

from eBay vendor ratings to Amazon book reviews even to

content sites such as Wikipedia and Digg.

The counterrevolution certainly won over big business, as

many firms have invested heavily in technologies to harvest the

wisdom-of-crowds. Greater openness and inclusiveness in

decision making, whether about what vendors are crooks or

which books to read, is probably a good thing, but could it be

possible that the wisdom-of-crowds crowd goes too far in its

claims? Scrutinize some of the celebrated examples, and it turns

out there is not much of a crowd involved-and there may not be

much wisdom either.

It turns out there are limits to the magic that crowdsourcing

can do. The spin on cognitive surplus put by Shirky's argument is

an appealing theory, but it implies that people with free time only

want to do productive, socially valuable things such as saving the

rain forest or marginally valuable things such as helping

consumer products companies come up with better slogans for

toilet paper. Human nature being what it is, surely some people

will use any cognitive surplus toward unproductive or even illicit

or immoral ends. laron Lanier, author of You Are Not a Gadget,

argues that another fundamental flaw of this approach is that it

could lead to a dystopian world of "just everybody doing

everything. "

What's more, at times barely 1 percent of any given crowd­

say, on Amazon or on Digg-actively participates in voting or

vetting. Studies done by the Wharton Business School suggest

that "power users," who may be motivated by some self­

interested agenda, may be skewing the results. Attempts to

average out results could lead to something worse: a reversion to

a bland mediocrity of answers, ignoring the truly brilliant outliers.

Experts argue that some of these problems can be overcome by

ensuring that a genuinely open and large crowd, as opposed to a

close circle of heavy users, both participates in the crowdsourcing

and shares in the profits that arise from it. But that approach

produces headaches of its own, for it often takes just as much

time and effort, if not more, for a firm to do crowdsourcing

properly as it does just to do the job in-house.

An Open and Shut Case?

It is not just crowdsourcing that has attracted skeptics: some are

unimpressed by the broader claims made for all of open

innovation. Kenneth Morse. formerly head of MIT's

Entrepreneurship Center, scoffs at IBM's claim to be an open

company: "They're open only in markets, like software, where

they have fallen behind. In hardware markets, where they have

the lead, they are extremely closed."

David Gann and Linus Dahlander, of London's Imperial

College, are also skeptical. They argue that firms have always

been open to some degree and that the benefits differ depending

on their line of business. Those using older technologies, for

instance, may benefit less. They also point out that the costs of

open innovation, in management distraction or lost intellectual

property rights, are not nearly as well studied as its putative

benefits.

Yet another critique comes from capital-intensive industries,

where products take a long time to develop and remain on sale for

years. Toyota's Bill Reinert laughs when asked about open

innovation. With the billions of dollars his firm spends on

research and on equipping its factories-not to mention a five­

year product development cycle-he suggests it would be foolish

to open up and allow rivals to steal its edge. "Eventually even

Google will have to make something tangible, and when they do

they will protect it-just like Tesla Motors [a much-ballyhooed

Silicon Valley start-up that makes electric cars] , which does not

have an open model," he adds.

GE's boss, Jeff Immelt, observes that his firm is a leader in a

number of fields, such as making jet engines and locomotives,

which requires " doing things that almost nobody else in the world

can do" and where intellectual property rights and a degree of

secrecy still matter. Mark Little, his head of research, is even

more skeptical and says outside ideas "don't really stick well

here." He professes great satisfaction with the output of GE's

own research laboratories. "We're pretty happy with the hand

we've got," he adds.

Though it is a formidable force sweeping through business

today, even boosters of open innovation agree that there are

perils. One of them is that it is not easy to work with outsiders.

When two firms try to tango, priorities can differ, trust may be

lacking, they may have wildly differing expectations on returns

on investment and risk, and they may be working on very

different time horizons. Corporate cultures can sometimes clash,

and some outsiders are not used to working in a business

environment.

Other difficulties arise when traditional R&D centers try to

work with many outside innovators, as typically happens in

incentive prizes or with crowdsourcing. Alph Bingham,

cofounder of InnoCentive, observes that �it takes a leap of faith

for big-company R&D to believe that freelance scientists are

reliable." The biggest problem is that researchers at a firm

ordered to work with outsiders can fear losing control. They are

also sometimes worried that successful ideas from the outside

might make them look less valuable to a firm. Many also dread

the workload of having to sift through thousands of suggestions

of variable quality in hopes of finding that precious needle in the

haystack.

Open Up and Say Aha!

Despite all of these legitimate concerns and obstacles, a growing

number of firms are concluding that the benefits of working with

people from such diverse organizations are worth the effort. For

one thing, patents are becoming much less important than brands

and trade secrets, given the speed at which products can be

brought to market. It is true that some of the rising stars in

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many of their innovations are still kept quiet. So fluid are their

markets, and so weak the historical patent protection in them, that

bosses often prefer to keep things in the dark and come up with

the next innovation as necessary to stay ahead of the competition.

Even in developed markets, the acceleration of innovation is

making patents less relevant. What is more, say brand experts at

P&G (which claims not even to count patents any longer), the

dizzying pace of change today confuses consumers with a

baffling array of choices. Such firms are increasingly turning to

trusted brands to simplify things for their customers. Andrew

Herbert, head of Microsoft's research center in Cambridge,

England, puts it this way: �Our brand hides a tremendous amount

of innovation."

Open innovation also appears to keep corporate bureaucrats on

their toes, making companies better at competing. The

combination of exciting new technologies and jUiced-up

management processes has, according to Lafley, helped P&G to

reduce its rate of failed product launches from eight out of ten to

just half.

Unilever's David Duncan insists that his firm-one of P&G's

biggest competitors-is much better connected to its customers

than it was. "Years ago, when I jOined, we were very closed,

vertically integrated, and owned most of the value chain-even

the chemicals and software we used," he says. Now it is much

more receptive to ideas and services from the outside, even

posting challenges on the Internet for people to come up with new

ideas. But he too confesses that there can be difficulties: "It's like

the first time you used Google; it's scary and a bit tricky, but soon

you see that it's great."

So how do you know if open innovation will work for a

particular company? It may well depend not just on what a

company does but also on how it is perceived in the market. Hal

Sirkin, of the Boston Consulting Group, suggests that rather than

see firms such as P&G and IBM as truly open innovators, it is

better to view them as beacons. They have enough world-class

experts working for them to attract outsiders who have brilliant

ideas. Such firms are "open" in the sense that they are now

casting a very wide net in their search for ideas. However, once

they have captured the essence of those ideas, argues Sirkin,

�they control them and the process of getting them to market."

Despite all the caveats, though, it is clear that open innovation

done properly is a good thing and that it is here to stay. For a

business that uses open and networked innovation, it matters less

where ideas are invented, especially if it uses the sorts of

remarkable incentive prizes that are now in the making.

Eyes on the Prize

One recent weekend, a curious cabal gathered in a converted

warehouse in a fashionably grungy part of San Francisco for a

closed-door conference. The group included some of the world's

leading scientific experts in fields ranging from astrophysics and

nanotechnology to health and energy. Also attending were

leading entrepreneurs and captains of industry, including Ratan

Tata, the chairman of India's Tata Group. The group was brought

together by the X Prize Foundation.

What were they up to? The foundation shot to prominence

with the Ansari X Prize, which offered $10 million to the first

private sector outfit to fly a reusable aircraft 100 kilometers into

space safely twice within two weeks. Defying skeptics, a team

financed by Paul Allen, a cofounder of Microsoft, won that prize

in 2004. Peter Diamandis. the mastermind behind the foundation.

grew convinced that �focused and talented teams in pursuit of a

prize and acclaim can change the world. "

So he gathered those big shots and big brains i n San Francisco

to dream up more audacious prizes to tackle grand global

challenges ranging from climate change to malnutrition. In the

wake of the disastrous BP oil spill in the Gulf of Mexico, for

example, the foundation announced a $1.4 million challenge to

come up with clever ways to clean up oil spills. This came just

days after the final round of competition for the foundation's

Progressive Automotive X Prize, a $10 million contest designed

to spur the development of the best car that can achieve a fuel

economy of 100 miles per gallon of gasoline-equivalent energy.

The X Prize plotters are hardly alone. Many charities,

including the Gates Foundation, are now increasing their use of

incentive prizes. Industry is also growing keen on this approach

and is often turning to online prize platforms. The biggest shift

may be yet to come. though. as there are signs that governments

are now jumping on the prize bandwagon.

The result is a dramatic surge in prize money on offer. This

trend raises two questions. First, do prizes really induce

innovation? And second, is it really a good use of taxpayer money

for governments to be offering prizes?

Prizes in themselves are nothing new, of course. The

Longitude Prize-a purse of up to £20,000-was offered by the

British Parliament in 1714 for the discovery of a practical means

for ships to determine their longitude. This was an enormous

problem on the high seas, as the inability to work out longitude

on the sailboats of the age often led to costly and deadly errors in

navigation. The greatest minds of the British scientific academy

wrestled with this problem but could not crack it. Sir Isaac

Newton, for example, was convinced the answer lay in

astronomy.

Happily, the Board of Longitude set up to administer the prize

did not favor those with fancy credentials or, for that matter,

those with British passports. This was a true global exercise in

open innovation. And in the end, it was a self-educated English

watchmaker, John Harrison, who found a down-to-earth solution.

His invention, a marine chronometer, ultimately transformed

ocean transport.

Nearly a century later, Napoleon offered a prize of 12,000

francs for an invention that would preserve food well so that his

army could march on a happy stomach. He had found on his

earlier campaigns abroad that locals often refused to sell his army

food, or that there was simply not enough to feed his troops even

if it was seized at the point of a gun. Nicolas Appert, the son of a

vintner and a purveyor of bonbons, took the prize in 1809 with a

disarmingly simple solution. He put food in champagne bottles,

which he then sealed and threw into vats of boiling water. Though

he could not explain why. it turned out that food trapped in

airtight containers did not spoil if it had been heated. This insight

led to related advances, such as using tin cans instead of bottles,

which directly led to a surge in the amount of vegetables, meat,

and fruits eaten by the growing urban masses of Europe-a huge

boost to public health. It remains the basis of canned food today.

Perhaps the most dramatic such incentive prize in history was

the Orteig Prize, which ushered in the age of long-distance air

travel. Raymond Orteig, a flamboyant hotel magnate, sent a letter

in 1919 to the head of the Aero Club of America, offering a

$25,000 prize to "the first aviator who shall cross the Atlantic in a

land or water aircraft (heavier than air) from Paris or the shores of

France to New York, or from New York to Paris without a stop."

Nobody even dared attempt such a flight in the five years Orteig

stipulated, so he extended the deadline by another five years. As

technology had advanced by then, numerous teams poured vast

amounts of money into the effort.

All in all, nine aviators joined the fray and spent a combined

total of $400,000. The winner was, of course, Charles Lindbergh,

an airmail pilot and mechanic, who pulled off the feat of daring in

May 1927. That prize demonstrates how incentive prizes can spur

innovation in cost-effective ways. For one thing, the total

investment far exceeded the actual value of the purse, offering a

huge bang for the buck. Also, such prizes often turbocharge the

tinkering process that leads to breakthrough innovations.

Lindbergh, for example, started with a conventional plane but

modified its fuselage, wings, cockpit, and various other features

to withstand the journey. Another element of such prizes is that

they attract enormous amounts of publicity to a given grand

challenge. When Lindbergh's plane went on a national tour after

his victory, it is claimed that one-quarter of the country came out

to gaze in wonder at the Spirit of Sf. Loais. The Orteig prize and

the resultant Atlantic crossing kick-started the aviation industry,

argues Diamandis, and led directly to the development of today's

$250 billion aviation business.

Alas, incentive prizes then fell out of favor in subsequent

decades, especially among governments. There were still plenty

of prizes around, but these-such as the Nobel-mostly rewarded

accomplishments after the fact. The problem is that there is little

evidence that such recognition prizes actually spark innovation.

T. S. Eliot famously remarked after receiving his Nobel that it

was like getting "a ticket to one's own funeral . . . no one has ever

done anything after he has got it. "

Prizes for All?

The big news is that incentive prizes are back in fashion.

McKinsey did a thorough global review of prizes and awards and

found that a big shift is under way from recognition prizes to

incentive prizes in recent years. Its experts also catalogue a surge

in prizes offered for science and engineering, climate change and

space-a departure from the dominance of arts and literary prizes

of the past.

There is now also evidence that such incentive prizes actually

spur innovation. A study led by Liam Brunt of the Norwegian

School of Economics scrutinized agricultural inventions in

nineteenth-century Britain, and found a link between prizes and

subsequent patents. The Royal Agricultural Society of England

(RASE) awarded nearly two thousand prizes from 1839 to 1939,

ranging from prestigious medals to purses worth £ 1 million in

today's money. They found that not only were prize winners

more likely to receive and renew patents (a useful if imperfect

proxy for innovation) but even losing contestants went on to seek

patents for more than thirteen thousand inventions.

Incentive prizes spark innovation in several important ways

that go beyond mere money. The academics studying the

agricultural prizes in Britain, for example, thought that the

prestige involved with winning such a prize was a more powerful

force than money. Many inventors, induding one who founded a

company that later became International Harvester, a well-known

manufacturer of agricultural machinery, proudly advertised the

fact that their inventions won RASE medals.

Another feature of well-designed incentive prizes is that they

can attract enough investment and invention to create entirely

new industries. The key lies in the power of a provocative prize to

inspire by transforming what people believe is possible.

The Ansari X Prize. for example. attracted over $100 million

in investment into the (preViously nonexistent) private-sector

space industry-and all that for a prize worth only $10 million.

The technology developed for the winning spaceship is now

being used by Virgin Galactic, part of Richard Branson's business

group, in its new commercial space travel service. For a mere

$200,000 or so, Virgin Galactic will soon whisk you into

suborbital space from its spaceport in New Mexico. Many of the

losing contestants have formed companies and are now profiting

from the burgeoning sector.

The most striking benefit is the opening up of the innovation

process. Firms increasingly tum to InnoCentive and its online

rivals. After all, everyone has had an aha moment-but usually

nothing comes of it. The democratic nature of online prize

platforms may be making the world a smarter place by connecting

grand challenges with hitherto untapped human potential.

A study co-authored by Karim Lakhani of Harvard Business

School. which reviewed many thousands of problems solved on

InnoCentive, confirms this. It found that outsiders not from the

scientific or industry discipline in question were more likely than

subject-matter experts to solve a challenge on that Web platform.

Intriguingly, women were more likely than men to be successful

solvers-which Lakhani thinks may indicate that brilliant women

are often sidelined at their corporate or academic jobs, leaving

them with the time and incentive to pursue outside prizes.

Companies are waking up to this notion that incentive prizes

are a powerful way to attract clever outsiders to a thorny problem.

Netflix, an American company that rents DVD or digital copies

of movies to customers online, decided in 2006 that it wanted to

improve the algorithms that help it match available movies with

customer tastes. It offered a $1 million prize to anyone that could

beat the model developed by its in-house experts by 10 percent.

The firm was stunned to receive entries from more than 55,000

people in 186 countries. Not only did the contest tap open

innovation, but it also benefited from online networking and

collaboration. Astonishing as it may seem, the winning team's

seven members all met together for the first time during the prize

ceremony in 2009.

Inspired by such successes, governments are now growing

keen on prizes. Britain and several other countries, in cooperation

with the Gates Foundation, are funding the Advanced Market

Commitment (AMC) , a massive prize for development and

diffusion of vaccines for neglected diseases of the developing

world. The first such prize, at a cost of $1.5 billion, was offered

to pharmaceutical firms to deliver vaccines for pneumococcal

disease (a big killer of children in the poor world) at low prices.

Merck and Pfizer are now shipping this vaccine.

Government agencies ranging from NASA to the city of

Chicago are now using online prize platforms to offer prizes, and

international governments are making inquiries too. Thanks to a

big push by the Obama administration, Congress passed

legislation at the end of 2010 that grants every federal agency the

authority to run incentive prizes. This matters, because before the

law passed, only NASA and the Department of Defense had clear

legal authority to run such prizes.

Grand or Booby?

This all is very exciting, but there are some trade-offs and

limitations. Nobody should care if a plutocrat tries to spend his

fortune on fanciful prizes-as one Robert Bigelow, heir to an

American budget-hotel fortune, did on an overly ambitious $50

million space prize that failed miserably. But government

resources are scarce. and taxpayer money spent on prizes may

come at the expense of other policies, such as grants to

universities or tax credits for corporate investment in research.

What is more, prizes used as public policy can be vulnerable to

political manipulation. In one case, an American government

prize for environmental performance saw the winning firm

suppress its breakthrough when the losers lobbied Congress to

relax the relevant regulations in their favor.

Thomas Kalil, a science advisor to Barack Obama and a

longtime advocate for the use of incentive prizes by government,

acknowledges the potential pitfalls. Still, he argues that the very

process of dreaming up challenges will sharpen up the

bureaucracy's approach to big problems: �I like prizes because

they force agencies to think clearly about outcomes."

One success was NASA's Lunar Lander Prize, which

delivered a much greater bang for the buck than the traditional

procurement process. Robert Braun, the agency's chief

technologist. points to the example of its recent prize for the

design of a new astronaut's glove. The winning entry came not

from an aerospace firm but from Peter Homer, an unemployed

engineer and onetime sailmaker in Maine. He used the $200,000

in winnings and his well-deserved fame to launch a new firm in

aerospace. Kalil insists that prizes make for good policy because

they can generate a �diversity of ideas from experts in many

different disciplines."

Fine, but not every problem can be solved with a prize. Where

the objective is a technological breakthrough, clearly defined

prizes work well. Other perils can also trip up prizes. Netflix tried

to run a second prize after its wildly successful first but

encountered a fierce public backlash over privacy rights: it turned

out that the �anonymized" customer data given to contestants was

not so anonymous after alL The firm was forced to scrap the

effort. Reed Hastings, Netflix's chief executive, reports that his

firm has not used this mechanism again: it's just one tool in the

toolbox, he now says, albeit a highly effective one. Even in areas

where other open innovation approaches seem promising, prizes

may be inappropriate. And as governments drift toward using

prizes for policy ideas rather than technical challenges, as

Chicago recently did to increase use of its mass transit system, the

results may get woolier and less useful.

Some politicians have even talked of setting up funds worth

billions to spur drug development. Ah, but prizes may not be as

useful for that purpose, warns Tachi Yamada of the Gates

Foundation. He has credibility in this

formerly the head of research

area. Not only was he

and development at

GlaxoSmithKline, one of the world's biggest pharmaceutical

firms, but his current foundation is also a big believer in incentive

prizes in other areas of development. It offers millions of dollars

in small and big prizes to people coming up with radical new

ideas to tackle various global grand challenges.

But developing a new drug and bringing it to market takes

fifteen years or more, and Yamada thinks even the AMC's carrot

of $1.5 billion may not be enough incentive. Observing that no

purse can match the $20 billion or so a blockbuster

pharmaceutical drug can earn in its lifetime, he cautions that

oftentimes �market success is the real prize."

Never Invented Here

The upshot of this exciting move toward openness is that

researchers can no longer ignore ideas that are "not invented

here." Managers need to focus on extracting value from ideas,

wherever they come from. After all, history shows that companies

:mrl r.ollntries th�t comp. IIp with np.w technologies �rp. often not

the ones that commercialize or popularize those inventions.

Thomas Edison did not invent the lightbulb and Henry Ford did

not invent the automobile, but the business models developed by

those innovators helped them make fortunes commercializing

those inventions.

That is a lesson that government officials and global

technocrats at such organs as the United Nations would do well to

learn too. That is because the world is getting to be a much riskier

place. as the next chapter describes, and the new risks of the

hyperconnected global economy demand bold new strategies for

innovation that go beyond the traditional turf-bound, insular

approaches. Richard Halkett. formerly executive director of

policy and research at the National Endowment for Science,

Technology, and the Arts (NESTA) , a British research body

devoted to innovation policy. jokes that the right policy for

companies and governments obsessed with creating national

innovation champions should really be �never invented here." He

may be right.

6

Black Swan Kills Sitting Duck

Mankind is enteIing an age in which the danger posed by

highly unlikely bat devastating events can no longer be

ignored. One sort of lisk arises from catastrophes such as

the BP oil spill in the Gulf of Mexico, the massive

earthquakes in Japan and Haiti, and other recent deadly

events. As society has advanced, the costs of such disasters

have grown exponentially. But there is an even greater

wony, as the subprime-mortgage-induced financial

meltdown and Icelandic-volcano-induced global chaos

demonstrate. The dramatic increase in the complexity of

industrial, financial, and economic netwOl*s means that

extremely rare localized crises can unexpectedly and

rapidly cascade into systemic risks that expose the

unknown fragilities of many widel� interdependent

netwOlks.

The challenge for innovators today is to confront this

more dangerous world boldly, without abandoning risk

taking, but also to do so wisely, by building resilience into

supply chains, organizational culwre, and society at lalge.

Doing so will require rethinking how to trade off risks

smartly, how to weigh costs against benefits more

efficiently, and how to experiment and fail more often but

more gracefully.

This chapter presents the evidence for thinking that the

world economy is indeed getting riskier. for individuals as

much as for firms and nations. This does not, however,

need to lead to a defensive crouch: innovators who are

prepared for a riskier wOlJd when rivals are not will find

opportunity where others encounter adversity.

The world is getting to be a more dangerous place. This

creates both problems and opportunities for innovators. The

previous two chapters have shown that innovation is getting faster

and more open. This chapter argues that it is getting riskier too. It

lays out the case for thinking that the global economy is entering

riskier times, and explains how leaders can build resilient systems

to predict, prevent, and prepare for such risks-and pOSSibly even

profit from them along the way.

Hang on a minute, though. The notion that the world is getting

riskier might seem strange to some. After all, isn't the history of

human progress one of improving living conditions and greater

prosperity for most of mankind?

At one level, such skepticism is justified. Through most of

history, the ordinary person's life was nasty, brutish, and short.

The biggest explanation for this, of course, was that almost all of

mankind lived in grinding poverty through almost all of history.

But the last two centuries have seen a spectacular rise in per-

capita income, starting with Europe and the United States, but

spreading powerfully to China and other emerging economies in

recent decades. Aside from poverty, two other hazards made life

particularly risky in the past: physical violence and the all-too­

common public health threats that led to misery and, often,

premature death. On these important measures, there is no doubt

that life today is much less risky than in the past.

Consider violence for a start. Steven Pinker, a renowned

cognitive scientist and author, has scrutinized the number of

bloody wars, murders, executions. cruel and unusual

punishments, highway banditry, sword fights, and other sorts of

violent acts inflicted by man upon man, and he concludes that

humanity lives in the best of times. Of course, the notion of the

noble savage was always a myth: archeologists have shown that

even the supposedly peace�loving Maya of Mesoamerica were, in

fact, quite violent at times. But what of the twentieth century,

often said to be the bloodiest in history? (Cue film footage of the

two world wars or Stalin's pogroms, each of which killed many

millions of unfortunates.) Pinker points out that despite that

undeniable and tragic death toll, when one takes into account the

overall global population, the last century was actually much less

violent in proportional terms than other epochs. And mankind is

getting less and less violent as time goes on.

He believes a confluence of happy factors explains this,

ranging from the spread of democracy and the rule of law to

changing attitudes toward corporal punishment, warfare, and

chivalry. Perhaps surprisingly, he adds globalization and the

information revolution to the mix, arguing that these trends widen

the "circle of empathy": a genocide in a remote corner of the

world that surely would have gone ignored by uninformed

outsiders now may, just possibly, prick the conscience of CNN

viewers in powerful countries who push leaders to act. A good

recent example is the decision by Western powers in early 201 1

to intervene in the Libyan conflict between Muammar Gaddafi,

the long-ruling tyrant, and rebels in the eastern provinces.

Another impressive advance has come in the shape of public

health innovations, such as antibiotics and vaccines, that have

extended lives, reduced misery, and otherwise improved the

health of everyone on earth. A century ago, adult life expectancy

was less than half of what is enjoyed by most people on earth

today and infant mortality was tragically common. Through most

of history, people were at constant risk of being struck down by

plagues and pestilences of unknown origin. Today, scientists of

course know that most were caused by bacterial or viral sources.

A simple cut that now would be healed in days by the use of a

bandage and antibiotics could, back then, result in an infection

that left a person stone-cold dead.

Despite these advances in tackling everyday dangers, mankind

is nevertheless entering more perilous times. That is because of

the rapid rise of two very different and much more worrisome

sorts of threats: costly catastrophic threats and global systemic

risks.

Our Final Century?

More than half a century after the height of the Cold War, Martin

Rees, a distinguished veteran of the antinuclear movement,

believes that the world came closer-and more often-to the

brink of thermonuclear destruction than most people realize.

Could it happen again? More broadly, could mankind, even

unwittingly, unleash a chain of events that destroys the natural

environment, and ultimately humanity itself?

The debate over how to safeguard the world is not limited to

disaster scenarios, of course. Conservationists, politicians, and

scientists of every hue continue to hold forth on mankind's

environmental depredations. For Rees, a respected Cambridge

University astrophysicist and Britain's astronomer royal, the

emphasis is on warning: he penned Our Final Hour a few years

ago as a clarion call. For others it is the more difficult task of

trying to devise prescriptions.

The specter of a terrorist attack or an accident involving bio­

organisms or nanotechnology so concerns Rees that he is ready to

wager anyone $ 1,000 that one million people will die as a result

of a single horrendous act by 2020. In addition to threats from

disgruntled misfits or religious radicals, he worries about the

destruction of the natural environment that may result from

broader policy choices made by society. And he is particularly

concerned that the current pattern of global economic

development might fuel climate change and biodiversity loss on

such a scale as to lead to environmental disaster. One of the most

brilliant scientists of the age estimates that mankind might have

only a fifty-fifty chance of surviving this century.

Consider, for example, the mysterious decimation of the bee

population in various parts of the world due to something called

colony collapse disorder. This had been observed in Europe and

the United States for several decades. But in 201 1 the United

Nations Environment Programme (UNEP) issued a warning

confirming that this problem was a global one with potentially

devastating consequences for humanity. That is because bees are

nature's chief pollinators, and more than two-thirds of the world's

food supply relies on them doing their mundane jobs. Achim

Steiner, head of UNEP, put it bluntly: �Human beings have

fabricated the illusion that in the twenty-first century they have

the technological prowess to be independent of nature. Bees

underline the reality that we are more, not less, dependent on

nature's services in a world of close to seven billion people."

What's more, the evidence is qUickly mounting that the world

is being buffeted by catastrophic risks, which by definition are

low�probability but high�impact events, much more often these

days. The most obvious recent example would be the triple

tragedy of earthquake, tsunami, and nuclear meltdown endured by

Japan in 201 1 , but other examples include the costly BP oil spill

in the Gulf of Mexico, the devastating earthquake in Haiti, and

the floods that ravaged parts of Pakistan recently.

It is tempting to dismiss this string of accidents as mere

anecdote. It would certainly be unscientific to claim that any

single weather�related event was definitively caused by climate

change. However, the economic evidence suggests that there is

something more worrisome going on. The Inter�American

Development Bank has analyzed four decades of disaster data for

Latin America, and it finds that the cost imposed by catastrophic

risks is now increasing at four times the rate of economic growth

in the region. Troublingly, the experts estimate that foreign aid

covers only about 8 percent of the direct cost of dealing with

those disasters.

Swiss Re, a leading global reinsurance firm, follows disaster

trends extremely closely (understandable, since reinsurers get

stuck with the bill). Even before the Japanese crisis of 201 1 , the

firm sounded alarm bells about the rising incidence and soaring

cost of catastrophic events. The global annual cost of such

disasters averaged, in inflation�adjusted terms, roughly $25

billion a year back in the 1980s; in the decade following 2000,

that figure shot up to $130 billion per year. The year 2008 saw the

toll rise to $270 billion (only $52 billion of which was insured)

and the loss of life reach 240,000. Nouriel Roubini, a prominent

economist at New York University's Stern School of Business

who correctly predicted the financial crash of 2008, recently

addressed a group of the world's leading risk managers and

experts and made this startling statement: �Events which should

happen once in fifty years are happening very often, and we don't

know why."

There are a few clues. One is that thanks to urbanization and

demographic shifts, far more people now live in cities and close

to waterways. Because this clusters both people and economic

activity. it magnifies the toll extracted by a given disaster if it

happens to hit close to those cities. Climate change. and the

associated disruptive weather patterns that it spawns, may also be

contributing to the freakish storms seen of late. Another factor to

consider is that the world is now much wealthier than it was in

the past and therefore simply has more assets to lose in any given

incident.

Although all of those circumstances play a role. each by itself

feels unsatisfying as the sole explanation for the trend. Larry

Brilliant, the head of the Skoll Urgent Threats Fund, believes

there is a more powerful connection. His nongovernmental group

monitors risks in such areas as climate change. water scarcity,

pandemic diseases, and nuclear proliferation. Reflecting on the

growing nature of these wicked problems, he remarks,

�Globalization has accelerated them all . . . they all have

worldwide impacts and no single country can tackle them alone. "

The Paradox of Globalization

Brilliant's observation reflects a powerful and contrarian insight:

the same globalization that has fueled global economic growth

and the rise of the middle classes in emerging economies in

recent decades has also made it much easier for catastrophic risks

to become global rather than local calamities. That pOints to the

second and even more worrying development: the increase in

global interconnectedness is leading to a higher level of systemic

risk. Catastrophic events such as the BP oil spill are bad enough,

especially since they are getting costlier, but that event did not

precipitate a systemic crisis. In contrast, the sub prime mortgage

meltdown in the United States sparked contagion that came

perilously close to causing a genuine systemic meltdown in

global financial markets. The worry is that the global economy

now faces a rising level of risk because of the proliferation of

incredibly complex and interlinked systems that extend well

beyond high finance.

Every year, the World Economic Forum surveys hundreds of

the world's leading academic risk experts, corporate risk

managers, government disaster-planning officials, and others

concerned about this topic in preparing its annual report on global

risk. The group's track record is impressive. In its reports from

2006 onward, for example, the WEF consistently identified asset

prices, indebtedness, and fiscal crises as top global risks-and, of

course, it was proved right.

When the WEF put together its report for 201 1 , it had this to

say: "The world is in no position to face major new shocks." And

yet, the group lamented, "we face ever greater concerns regarding

global risks and the prospect of rapid contagion through

increasingly interconnected systems and the threat of disastrous

impacts." At the very top of the list of those global threats was

climate change. However, two other cross-cutting threats also

made the top of the list. First, glaring gaps in global governance

bothered the risk managers. They pointed, in particular, to the

difficulties encountered by negotiators of the climate change

accords under the UN's Kyoto Protocol and the World Trade

Organization's Doha round of trade liberalization talks. The other

top risk cited was growing economic disparity, seen both among

and especially within countries. These risks, the experts warned,

meant that the same globalization that has brought the world

closer together may lead to a backlash that tears the world apart.

No Safety Net

Tying together the threads of globalization and

interconnectedness. Herman �Dutch" Leonard of Harvard

University points to another factor that is making the world

economy riskier today. He observes that many of the systems that

have developed to allow the 2417. open, and connected global

economy are complex and interlocked-but goes on to note that

the buffers and shock absorbers in that system are insufficient and

under great strain. A good example of this can be seen in the

global supply chain. Led by cost-conscious and efficiency­

minded multinationals such as Walmart, firms everywhere have

migrated to lean inventory management techniques and just-in­

time manufacturing.

This is great when times are good, but when disaster strikes it

can amplify the impact of any local disruption. The explosion of

Eyjafjallajokull, an Icelandic volcano. in 2010 and the Japanese

tsunami in 201 1 both had much greater than expected ripple

effects on the global supply chains of everything from food to

cars to iPads. Leonard observes that the eruption disrupted

delicately balanced systems and brought the global economy to

within days of a spiraling supply chain calamity. After the

Japanese disasters, Harley-Davidson had difficulties getting hold

of radio components. Sony ran short of displays and batteries.

Toyota. GM, and other automobile manufacturers were forced to

cut production because of parts shortages caused by the

earthquake and tsunami. Apple took extraordinary measures to

make sure it got the parts it needed in time for the much­

anticipated launch of the iPad 2 in early 201 1 , but it was still

knocked sideways by the Japanese tragedy-not because of

shortages at its primary suppliers but because of woes at the

suppliers to those suppliers. What all that shows, argues Leonard,

is that "our buffers are drained."

The central arguments about systemic risks are put forward

persuasively by Charles Perrow in Nonna} Accidents. A complex

system is one that is made up of three or more subsystems. The

subsystems are linked with each other, creating feedback loops

that can self-reinforce or cross over and reinforce each other.

Crucially, such systems are tightly coupled, meaning that there

are no buffers or shock absorbers in the links between

subsystems. This means that when something goes wrong in one

subsystem, it automatically produces input errors in the

subsystems it is connected to, which, when amplified by the

feedback loops, leads to chaos. In fact, because errors will

eventually occur in two subsystems simultaneously, pushing the

system past its margin of safety, a failure of the whole system is

on the cards virtually by design.

"A collapse, often sudden, of the whole system is not only

possible but inevitable," insists Leonard. He pOints to the telling

example of the South China snowstorm of 2008. This was a bad

but not cataclysmic storm, but because of the failure of multiple

subsystems it wreaked economic havoc and proved much deadlier

than it should have. Multiple bits of essential infrastructure-rail,

electricity, food supply-all collapsed at around the same time.

The reason, Leonard argues, was because they all needed each

other: the food moved on rail; the rail was electric; electricity

production needed coal; coal arrived only by rail; the snowstorm

killed the power.

This is a huge problem that will only get worse unless leaders

in business and government come together to manage these risks

more sensibly. Nassim Taleb, author of the bestseller The Black

Swan, warns against complacency, given today's interconnected

systems: "Globalization creates interlocking fragility, while

reducing volatility and giving the appearance of stability."

In Global Catastrophic Risks, a thoughtful collection of

essays, Richard Posner argues that the world is underinvesting in

the mitigation of several global catastrophic risks of the sort that

Rees worries about. In that same volume, Robin Hanson offers

this compelling reason to pay attention: "The main reason to be

careful when you walk up a flight of stairs is not that you might

slip and have to retrace one step, but rather that the first slip

might cause a second slip, and so on until you fall dozens of steps

and break your neck. Similarly we are concerned about

[catastrophes] not only because of their terrible direct effects, but

also because they may induce an even more damaging collapse of

our economic and social systems."

Prevent, Predict, Prepare . . . and Profit?

That is a frightening thought, but happily a vanguard of risk

managers and governance experts is coming up with something

resembling a manifesto for action. The group draws inspiration

from successful responses to past natural disasters, though the

lessons gleaned there apply much more widely. Whether one is

dealing with financial meltdowns, pandemics, nuclear crises, or

terrorism, the risk experts associated with the WEF argue that the

principles arising from global experience with natural disasters

"are unanimously deemed applicable."

One broad theme emerging from this work is the desperate

need for integrated, cross-industry, pan-regional risk analysis­

not the bureaucratic silos and navel-gazing approaches taken in

the past. An example of what works is the Mekong River

Commission (MRC) , which oversees resource planning and

disaster management for that Southeast Asian river delta. Most

such bodies in other regions are local or national at best and

usually look only at specific issues such as flood management. In

contrast, the MRC counts five regional governments as members,

and it performs thoughtful cost-benefit analyses on issues ranging

from energy and water to food-all of which, of course, are

linked both to the river's health and to each other. And given the

rapid contagion seen in the recent financial crisis, such cross­

jurisdictional cooperation makes sense at the global level in

tackling many big risks.

Cross-disciplinary thinking makes sense within countries too.

That makes it desirable to appoint chief risk officers for countries,

much as companies do today, so that they can scan the horizon

for longer-term and interlinked threats that individual ministries

may ignore. To its credit, Singapore already has an expert

government body that does something like this. Larry Brilliant

thinks it is just as important to educate those at the bottom about

risk as those at the top. He wants schools to teach children what

he calls �the four R's": reading. writing, arithmetic, and risk

literacy.

Beyond that general philosophical shift, the specific

recommendations now bubbling up fall into three broad

categories: prevention, prediction, and preparation.

Some disasters will happen no matter what measures are taken

in advance to prevent them, but the world can do much better on

the prevention front. Both Chile and Haiti were struck by massive

earthquakes around the same time in 2010, but the former was a

minor crisis whereas the latter was a horrific, large-scale

meltdown of the entire country. Why? One obvious reason is that

Chile is wealthier than Haiti, which helps in many ways, but it is

still a developing country with lots of poor people. What Chile

did have, though, was much better building codes and safety

regulations that were actually policed and enforced, so the

housing stock and infrastructure in the earthquake zone were

much better able to withstand the blow. That suggests one way

countries can prevent some of the losses arising from inevitable

disasters is to have proper regulatory precautions in place in

advance.

A related point is the need to avoid policy distortions that

encourage reckless behavior in the first place. One problem arises

from externalities that are ignored by public policy. Consider the

contribution to global warming made by burning carbon-intensive

fuels such as coal: the energy user pays a market price for coal,

but she gets off lightly by not paying for the damage done to the

environment and human health by burning that filthy fuel.

Policies that internalize that externality, such as carbon taxes

imposed on fossil fuels, would help change behavior and possibly

prevent future natural disasters.

Governments should also abolish perverse subsidies that lead

to behavior that puts people needlessly at risk. A good example is

the encouragement by governments-including that of the United

States-to build in areas well known to be at risk from hurricanes

and flooding. Policies such as subsidized flood insurance and

development-friendly zoning regulations make it cheaper for

people to move into such areas as the North Carolina and Florida

coasts that are picturesque but hurricane prone. Such policies also

give the implicit guarantee of rescue by taxpayer-financed first

responders, search-and-rescue teams, and so on to people who get

in trouble by putting themselves in harm's way.

Another good way to deal with big risks is to try to predict

hazards using intelligent infrastructure. Embedding energy grids,

buildings, and other bits of the built environment with smart

sensors, alarms, sniffers, and other signaling devices can help risk

minders keep their fingers on the pulse of emerging threats. This

looks to become a multibillion-dollar industry. IBM was early in

this game, promoting its vision for a �smarter planet" made up of

digitally connected traffic systems, energy grids, and even entire

cities. Hewlett Packard is working on a "central nervous system

for the earth," while Cisco trumpets �smart and connected

communities. "

Smart systems can also help avoid problems like climate

change and water scarcity in the first place by improving the

efficiency with which resources are consumed. Much of the

world's fresh water is wasted before it reaches thirsty mouths, for

example, and centralized electricity grids are needlessly

inefficient. The sector is attracting many young technology

companies, a sign perhaps of innovations to come. One of them,

Israel's TaKaDu, offers a Web-based service that uses sensors,

data, and analytics to become the "eyes and ears" of water

utilities.

A thoughtful exploration of future trends in resilience supports

the argument that smart systems can help. The Rockefeller

Foundation asked the Global Business Network (GBN) to put

together likely scenarios for the evolution of technology and

international development. After an extensive survey of the topic

and interviews with scores of leading experts, GBN came up with

four plaUSible scenarios that it plots along two axes: one axis

shows the world's adaptive capacity, while the other gauges its

political and economic alignment.

The best possible outcome would be a world that scores highly

on both axes, a scenario called Clever Together: �a world in

which highly coordinated and successful strategies emerge for

addressing both urgent and entrenched worldwide issues." If

alignment is strong but adaptive capacity weak, the experts

predict Lock Step: "a world of tighter top-down government

control and more authoritarian leadership, with limited innovation

and growing citizen push back. " If adaptive capacity is high but

political and economic alignment weak, they expect a Smart

Scramble: "an economically depressed world in which

individuals and communities develop localized, makeshift

solutions to a growing set of problems." The real worry, though.

is that both political coordination and adaptive capacity will

collapse, leading to the Hack Attack: "an economically unstable

and shock-prone world in which governments weaken, criminals

thrive, and dangerous innovations emerge." The report concludes

that while the four scenarios vary significantly from each other,

one common theme emerges: new innovations and uses of

technology will be a big part of the story going forward.

The move toward smart systems is exciting, but it does raise

concerns too. Some, such as the threat posed to privacy by

putative Big Brothers having access to so much data, can

probably be managed. However, if the headlong rush toward

intelligent infrastructure merely creates a gold-plated version of

today's brittle, centralized systems, then it will only be setting the

world up for an even harder fall in the future. All that data will be

giving risk lIIanagers a fabe sense uf securily, argues Harvard's

Dutch Leonard, because all centralized systems have the potential

to fail-"and when they do, they break with a vengeance." His

research suggests that people underestimate the risk of systemic

breakdown and overestimate the robustness of such systems.

From Risk to Resilience

That points to the third way that the world can deal better with

catastrophic risk: better preparation. That argues for

decentralization and empowerment of localized decision making.

Organizations typically have a response plan crafted at

headquarters that kicks in when a crisis hits. The snag arises when

business is interrupted not in the way the playbook anticipates but

in some strange and disconcerting new way. When a crisis hits in

an unexpected way-as Chicago experienced during a crippling

snowstorm in the winter of 2010- 1 1 that shut down even this city

of broad shoulders-a preViously determined centralized plan

may have to give way to intelligent improvisation. But in

Chicago's case, the city's officials were too wedded to their

centralized evacuation plan to let go of it. even after it became

clear that it was failing.

A better way, says Leonard, is to "figure out how to make

your 'edges' learn and respond qUickly to unexpected risks." This

is not as outlandish as it may sound. Vivek Kundra served as

Barack Obama's first chief information officer at the White

House, but before that he was in charge of technology for the city

government of Washington, D.C. In thinking about crisis

planning, he draws inspiration from networked, distributed

systems such as the Internet that he believes have no Single point

of failure. He ordered the installation of global positioning

technology on the district 's snowplows and made the information

available online so that people would not have to go outside to

find out which streets had not been plowed or what the road

conditions looked like. He beams with pride when he describes

how dealing with crippling snowstorms got easier as ordinary

citizens began to use the GPS data, assess local conditions

through firsthand experience, and suggest better routes for the

snowplows to follow.

Decentralized approaches offer an attractive way forward, but

depending on how they are carried out they can be a source of

strength or of inefficiency. Resilience is much more likely to

feature in systems that are decentralized, intelligent, and well

coordinated. Leonard argues that thus far what the world has

mostly seen are two undesirable alternatives: systems that are

decentralized and coordinated but sluggish, or ones that are

decentralized and adaptive but uncoordinated. He adds an

optimistic note: "While we underappreciate the risks of such

systems. we also tend to underestimate the ingenuity and

resilience of people when there are system-level issues."

Alas, trusting open systems and decentralization does not

come easily to managers or government officials, who tend to

shut down and adopt a bunker mentality during crises. Doing

scenario-planning exercises, carrying out dry runs, and practicing

improvisation can help. So too does letting employees know that

they will not be punished after the fact for their decisions, as long

as they did so with the best information available at the time and

in a manner consistent with the organization's values.

But this is not a call for complete decentralization, which can

also lead to bad outcomes in a crisis. Ushahidi, a dynamic

nonprofit outfit that provides free software and Web tools for

open and collaborative innovation, found that many people used

its interactive mapping and communication tools in the aftermath

of the Haiti earthquake to help with disaster relief. Unfortunately,

the information posted grew chaotic and at times conflicting,

leading to confusion and pOSSibly hurting the aid effort. The firm

has since launched Swift River, an initiative designed to verify

and filter raw input so that the do-gooders do not get led down

false trails in the wake of tragedy.

Another way risk managers can better prepare for inevitable

disasters is the creative use of insurance products. When

extremely damaging hurricanes or droughts hit, most poor

countries scramble for money. and they rarely get enough from

aid to rebuild and help the victims properly. Hoping to break that

cycle. Mexico has agreed on an insurance policy with Swiss Re

and the World Bank that would pay money to farmers

automatically if hurricanes or several other specified types of

natural disaster cross agreed thresholds of intensity. Vietnam has

entered into a similar insurance deal that would pay out money to

poor rice farmers if bad weather results in rice yields that fall

below agreed levels. In effect, these countries are paying a small

amount now to transfer part of the risk of future disasters onto

capital markets, and in doing so providing their vulnerable

populations with a valuable safety net.

The most controversial way to prepare better for a riskier

world is to stockpile. This applies both to industrial corporations,

which worry about physical stocks, and to financial institutions,

which are concerned about capital adequacy ratios. This is a

difficult pill for businesses and banks to swallow. as carrying

more inventory or maintaining more capital and liquidity means

higher costs. However, lean and just-in-time inventory

management systems are simply not robust enough to handle the

sorts of disruptions that today's unexpectedly interconnected

supply chain produces. And being out of stock costs money too,

as firms are discovering to their detriment. A study published a

few years ago found that firms that suffered from Significant

supply chain disruptions saw their share returns drop by a third

versus the benchmark for their industries. Similarly. taking

outsized risks without sufficient capital and liquidity to cover

them is a recipe for disaster in times of market stress. And the

blow dealt to a firm could be fatal, as recent experiences have

shown.

That is especially true if competitors prepare more robustly

and are able to stay in the game. Consider what happened in the

wake of the Icelandic volcano surprise that shut down air traffic

in large parts of Europe in 2010. Many firms struggled to

understand the systemic problem, which their standard disaster

plans had not predicted, and then found their supply systems too

rigid to deal with the shutdowns. Not customers of DHL, though:

its managers qUickly switched cargoes to southern European

airports, which were not immediately affected by the volcano,

and arranged trucks and ships to substitute for air cargo. Even

though it slowed things down a bit, the managers insisted on full

scanning of all packages on the new routes, which allowed

customers to track their packages through the crisis. Transparency

and nimble, decentralized systems saved the day.

In sum, what the world needs now is to invest in resilient

systems that prevent, predict, and prepare for the costly

catastrophes buffeting the world economy. The conventional

notion of resilience smacks of passivity and invokes the

unattractive image of a defensive crouch, but Nassim Taleb

argues against this. Instead, resilience should be seen as a fount of

competitive advantage for industries and countries, a source of

innovation and experimentation for cities, and a spigot of future

profits for companies.

The challenge of building resilient infrastructure is setting the

worlds of architecture, design, and city planning alight. For

example, developers in New York are now considering the use of

advanced absorbent materials for sidewalks in low�lying areas at

risk from sea-level rise: the clever concrete sucks in water as fast

as it comes in, to avoid the worst damage from sudden floods, and

releases it only slowly over time. City planners in Asia and the

Middle East are building resilient eco-cities from scratch, hoping

to leapfrog ahead of Western rivals (who are often stuck with

legacy infrastructure of the vulnerable, nonresilient variety) in

attracting the knowledge workers and creative companies of the

twenty-first century.

Judith Rodin, head of the Rockefeller Foundation, offers this

elegant motto for coping with this risky new world: "We must

have the capacity to respond adaptively to both acute and chronic

stresses-while flourishing." Rather than merely returning to the

status quo after the shock ends, she argues, truly resilient systems

adapt and change with the times. The global economy is moving

faster. growing more open. and getting riskier-meaning

innovators must also adapt and change if they are to flourish.

And, argues Stewart Brand paradoxically, they must be bold

enough to take more risks-albeit more carefully considered ones

-if humanity is to overcome this generation's grand global

challenges.

In some respects, Brand's green credentials are impeccable.

His mentor was Paul Ehrlich, the author of The Population Bomb,

published in 1968. That book, and the related Club of Rome

movement of the 1970s, famously predicted that overpopulation

would soon result in the world running out of food, oil, and other

resources. Though it proved spectacularly wrong, its warning

served as a clarion call for the modern environmental movement.

Brand made his name with a publication of his own, which

also appeared in 1968, called The Whole Earth Catalog. It was a

pathbreaking manual crammed with examples of small-scale

technologies to enable individuals to reduce their environmental

impact, and is best known for its cover, which featured a picture

of the Earth from space (which Brand helped to persuade NASA

to release). The book became a bestseller in anticorporate and

environmental circles. In 1985 Brand cofounded the WELL, a

pioneering online community that was a precursor of today's

social-networking websites such as MySpace and Facebook.

Brand still has a following among the Birkenstock set, and he

even lives on a houseboat in Sausalito, near San Francisco. But

meet him in person and it becomes clear he is not exactly your

typical crunchy�granola green. Sitting down to lunch at a posh

beach resort on Coronado Island, off San Diego, he does not

order a vegan special but a hearty Angus burger with bacon and

cheese, french fries, and a side order of lobster bisque. ''I'm

genetically a contrarian," he says with a broad smile.

That is pretty evident from his recent proclamations, as the

septuagenarian countercultural icon remains determined to rock

the boat. But this time his target is the environmental movement

itself. He has come up with a series of what he calls

�environmental heresies," which he hopes will influence a new

generation of pragmatic, problem-solving greens. Three things

that most greens vehemently oppose-genetic engineering,

urbanization, and nuclear power-should, he believes, be

embraced on environmental grounds.

Start with genetic engineering. Many greens object to the idea,

fearing a deluge of �Frankenfoods" and the contamination of

pristine wild species. But Brand pOints to the work of the late

Norman Borlaug, the Nobel Prize winner who proved the Club of

Rome (and Brand) wrong with his "green revolution" in

agricultural productivity. Brand now sees great promise in using

genetic science to feed the world, and perhaps prevent future

wars, by making crops that are more disease-resistant, drought­

tolerant, and produce higher yields.

Similarly, he argues that urbanization can be good for the

environment. Mankind has now become a primarily urban species

for the first time in its history, and every serious forecast predicts

a surge in the size and number of megacities. Most

environmentalists are dismayed at this trend and worry about the

implications of urbanization for air pollution, resource

consumption, and so on. But Brand bluntly rebuts them, insisting

that megacities �wil1 increase the Earth's carrying capacity for

humans. "

That may seem an odd argument from a man who wrote a

gUide to natural living and going "off the grid," but it reflects

another aspect of the maturation of his views. Cities are good for

the planet, he argues, because they are engines of wealth creation,

and greater prosperity makes promoting sustainability easier.

When poor people move from bleak subsistence farming to the

economic opportunities found in urban slums, he insists. they no

longer need to chop down endangered trees or eat bush meat.

�Nature grows back," says Brand. He also believes cities unleash

innovation-pointing to the use of mobile phones in slums to

send money-and reckons the next big trend will come �not from

Japanese schoolgirls, but slum-dwellers in Africa."

Brand's critics accuse him of romanticizing the potential of

megacities. But his support for the revival of nuclear power is

even more controversial. For years, he held the orthodox

environmental view that nukes were evil. He now confesses that

this was merely "knee-jerk opposition," not a carefully

considered opinion. His growing concern about global warming,

which he calls "the single most important environmental threat

facing mankind," explains his U-turn in favor of this low-carbon

but hugely unpopular source of electricity.

The turning point came, he says, when he visited Yucca

Mountain, a remote site in the Nevada desert where the

Department of Energy had for years planned to bury the country's

nuclear waste. He was visiting the site as part of his Long Now

project, which aims to build a �clock" that wi1l last ten thousand

years or more in the hope of encouraging society to think about

very long-term issues. While studying the deep hole in the ground

at Yucca for tips on building his clock-the site, like the clock, is

being designed to survive unscathed for thousands of years-he

had an epiphany.

Although greens and other antinuclear activists oppose the

Yucca Mountain project (opposition that led the Obama

administration to try to kill it), Brand says he realized that "we

are asking the wrong question" about nuclear power. Rather than

asking how spent nuclear fuel can be kept safe for ten thousand to

a hundred thousand years, he says, we should worry about

keeping it safe for only a hundred years. Because nuclear waste

still contains an enormous amount of energy, future generations

may be able to harness it as an energy source through tomorrow's

better technologies.

But what about the nuclear accidents in japan that unfolded

following the recent tsunami? Surely that is the clinching

argument against this technology? That is certainly the lesson

learned by Germans, who voted to kill off the country's big

nuclear power sector in the wake of the japanese accidents. Brand

acknowledges the tragedy in Japan but insists on putting that

experience in context. In the grander scheme of things, far fewer

people have been hurt or killed by that episode (or by all nuclear

plants through hiStory, for that matter) than have been harmed or

killed worldwide by the burning of coal-a point usually ignored

by antinuclear activists. Carbon-free nuclear power remains a

potent and scalable way to tackle climate change, he insists. The

right way to see the japanese disaster is as a learning experience:

the nature of interconnected risks and the likely human responses

have been put to the test and now can be improved for next time.

Shades of Green

Brand may well be wrong about nuclear power: the energy source

that was once claimed to be "too cheap to meter" looks more

likely to be remembered by history as too costly to matter. Even

so, he gets one big thing right: his willingness to get his hands

dirty and balance one risk against another, rather than clinging to

ideologically pure positions when confronted with difficult

choices. sets Brand apart from the many ideologues in the

environmental movement. Indeed. he proudly calls himself an

"eco-pragmatist . " He argues that two ideological camps have

dominated the green movement for too long: "the scientists and

the romantics." The former group has been stuck in the iVory

tower, while the latter has held on to noble but impractical views

that, he reckons, have often been contrary to rational scientific

thinking. The grip that these two rival camps have had on

environmentalism, he says, explains its malaise.

But growing public awareness of climate change and other

green concerns promises to end this. "Environmental change

changes everything," he insists, "and among the biggest change

of all will be in environmentalism itself." As environmental

issues have moved up the technological agenda, says Brand, there

has been a large influx of engineers into the environmental

movement. These "techies" had previously been deeply skeptical

of the greens, but he now thinks they may save the cause even as

they save the planet. Unlike the romantics and the airy scientists,

he says, "engineers focus on solving problems."

Brand's own pragmatism can be seen in his willingness to

own up to his mistakes and learn from them. When his alarmism

over the Y2K computer bug turned out to be wrong, for example,

it made him realize that his own personal computer was a poor

proxy for the world at large. which is "modular. shockproof. and

robust. " And the key mistake made by the Club of Rome's

forecasts (which he calls "self�defeating prophecies"), he now

acknowledges, was to see the world as static and to place too little

faith in the possibilities of technological progress. He firmly

believes society can develop the resilience needed to survive and

even flourish in the coming era of black swans.

His critics might argue that Brand now places too much faith

in clever engineers and fancy technology to solve the world's

environmental problems. But he can respond that his pragmatic

approach goes back a long way and has deep roots. As he put it in

the introduction to The Whole Earth Catalog, written four

decades ago: "We are as gods and might as well get good at it."

So what should divine governments, companies, and

individuals do if they aspire to flourish in this age of complex

risks? The final section of the book explains how to harness

innovation in the Age of Disruptive Innovation.

Part Three

Greed: How to Win in the Age of

Disruptive Innovation

Part Three

Greed: How to Win in the Age of

Disruptive Innovation

7

The Sputnik Fallacies

The need for innovation has never been greatel� as the first

section of the book explained. In addition, the velY ways in

which innovation happens-meta-innovation-are

changing fast, as the second section of the book algued.

That points to a pressing question: what to do about it?

This final section of the book delves into the question of

what governments, companies, and individuals can do to

win in the age of dismptive innovation.

This chapter tarns a cliticai eye to the arguments put

forward by proponents of industIial policy. It is

fashionable today to argue that the lise of China

represents an existential economic threat to the West, one

that can only be countered by a dramatic government effort

akin to the Apollo moon shot.

It is right to &7y that developed countries need to fix

various aspects of their innovation ecosystems. The United

States, for example, must address /Jaws in its policies on

immigration, education, and basic infrastructlJre.

Howevel� calls for an aggressive return to industrial

policies of the sort seen in the 1970s and 1980s are

wrongheaded and dangerous. Especially given the

dramatic changes in how innovation is happening from the

bottom up and the inside out, a retlJrn to the failed

centralized approaches of the past would be folly.

Will China eclipse the United States as the world's innovation

powerhouse? At the end of the Second World War, American

spending on research and development made up half the world's

total; today, it has dropped to one-third. South Korea, China, and

India are pouring tens of billions of dollars into scientific fields

that range from genomics to nanotechnology. They are producing

staggering numbers of engineers and scientists, who in turn are

publishing lots of papers and acquiring ever more patents.

The notion that Asian innovation is surpassing that of the

West has led to much public anguish in the United States. In

2009, the Aspen Institute put on a major conference in

Washington on the topic of the U.S. innovation crisis that

attracted many chief executives, cabinet officials, congressional

leaders, and experts on various aspects of the topic. To set the

stage, the organizers revealed the results of a big poll sponsored

by Intel that showed that Americans were tremendously insecure

about their country's economic leadership: roughly the same

numbers believed that the United States would remain in the

global innovation lead as felt that China would pass the United

States. Newsweek ran an article about all this at the time titled, "Is

America Losing Its Mojo?"

The pessimistic drumbeat only grew louder in coming months.

A commission of twenty eminent people organized by the

National Academy of Sciences and the National Academy of

Engineering, which included Nobel laureates and heads of

leading companies, had produced an influential report back in

2007, called Rising Above the GatheIing 5to17n, on the threat to

America's leadership in the global economy. In 2010, at

congressional urging, the commission released an update on that

warning. Far from improving, declared the panel of grandees, the

storm is now "rapidly approaching Category 5." The group

demanded immediate government action.

This G�l1 to :ums is p.r.hop.ci hy m:my who SP.P. Chin<J's risp. <JS <J

threat akin to the Soviet Union's Sputnik program, which sent the

first manmade object into orbit back in 1957. That daring feat so

shocked the United States that it led to a dramatic expansion of

efforts in science, engineering, and space-a government-funded

boom that kicked into high gear with John F. Kennedy's call in

1961 for the country to put a man on the moon by the end of that

decade. Michael Mandelbaum, a foreign policy expert at Johns

Hopkins University, has claimed that "our response to Sputnik

made us better educated, more productive, more technologically

advanced, and more ingenious."

On this view, the United States should seize on the new Red

Menace to launch another bold, government-led "moon shot" that

would boost innovation and put the country back on top. A

growing chorus of business leaders, academic experts, and labor

busses is calling fur a dramaLic change in guvernmenL pulicy Lu

salvage the broken U.S. innovation system. Thomas Friedman has

devoted various of his New YoIi Times columns to this topic, one

of his favorite themes, and they have served as rallying cries for

the "new Sputnik" movement.

The Sun Also Sets

Hang on a minute, though. Look closely at the claims made by

the chorus of doom, and it turns out there are three dangerous

fallacies embedded in the Sputnik analogy. First, this approach

assumes that the rise of the rest must come at the expense of the

West. The second mistake is the assumption that China's

innovation capacity is already on par with that of the United

States. Finally, and perhaps most important, the moon shot

mentality leads too easily to a top-down, government-dominated

approach to innovation that is out of synch with the global trend

toward the bottom-up. open innovation approaches that are

essential to tackling the world's most difficult problems.

Consider the flaws in turn. For one thing, the Sputnik mind-set

approach assumes that innovation is a zero-sum game. If China is

up, then the United States must be down. But that is not

necessarily true: history shows that one company or country can

benefit from the development and marketing of a clever

invention, while the robust diffusion and adoption of such

inventions can also benefit many others. This is a lesson that

should have been made clear by the wave of hysteria in the West

over Japan's rise in the 1980s. Back then, it was popular to decry

the unstoppable rise of that Asian power as an economic force

that would suck away American jobs and lead inexorably to the

decline of the United States. Yale University's Paul Kennedy

asked in his 1987 book The Rise and Fall ofCreat Powers (which

posited that Japan would surpass the United States just as surely

as the Yanks surpassed the Brits) just how powerful,

economically, Japan would be in the early twenty-first century.

His answer: "mach more powerful." Lester Thurow, dean of

MIT's Sloan School of Management during that period of

American malaise, argued that "Japan would have to be

considered the betting favorite to win the economic honors of

owning the twenty-first century." Both experts fueled the

insecurity of the day that America's market-oriented economy

would decline as japan's government-directed miracle economy

soared.

In fact, japan's peaceful rise did not come at the expense of

the United States, and China's advance today does not have to

come at the West's expense either. just as a rising tide lifts all

boats, the economic dynamism of the emerging giants today can

open vast new markets and expand global trade, increase

opportunities for specialization, enrich lives everywhere, and

increase opportunities for competitive American firms. But the

tide will not raise boats that have holes in them, which is to say it

is still worthwhile for firms to remain fit and for governments to

ensure that the preconditions for successful innovation are in

place-including keeping out of the way when old industries and

uncompetitive firms have to die to make way for vibrant new

players.

To see why, consider what actually happened to japan after

those predictions made in the 1980s. After reaching the number

two spot in the global economy. the country plunged into a lost

decade of economic stagnation, consumer atrophy, and deep

national anXiety. In fact, on some measures China has passed it to

become the world's second-biggest economy. Part of the

explanation for what went wrong lies on the demand side of the

ledger. After japan's real estate and stock market bubbles burst,

the country was overburdened with bad debt. Rather than deal

with the problem SWiftly, as the United States did during its

savings-and-loan crisis. japanese policy makers chose the less

controversial path of flooding the market with government love

and money. It did not work. Consumers were unpersuaded of the

country's prospects, and demand remained anemic.

The less understood part of the japan story has to do with

supply, however. The country's demography did not help, as it is

one of the most rapidly aging societies and one with very low

rates of fertility. It is also one of the developed world's most

insular and anti-immigrant nations. That double bind means the

supply of available workers is declining and the theoretical

growth potential for the economy is taking a hit. Still, observes

Harvard's Clay Christensen, japan remains a wealthy, educated,

and technologically sophisticated economy, so it should have

been able to rebound by now if the government had gotten out of

the way of the proper functioning of capital and labor markets.

Pff�r.isp.ly hP.GHlSP. its Arms h:ul hp.p.n so Sllr.r.p.ssf1l1 �t

disruptive innovation, japan's once-ridiculed companies (it seems

unimaginable now, but Hondas were once known for

unreliability, not quality) had come to dominate global markets in

cars, shipbuilding, steel, and semiconductors. They surpassed

their American rivals- who had been complacently basking in

the profits to be found at the technology frontier-to become top

of the heap. Ah, but that rise to the technology frontier is what

made those japanese upstarts vulnerable to disruption from the

next wave of disruptive innovation, argues Christensen. japan

could have gotten its economy out of the cellar if its business and

political leaders had encouraged the redeployment of capital and

labor from stagnant, overcapitalized industries of the past to new,

emerging technologies and enterprises. Instead, they defended

unviable jobs and bloated companies they considered national

champiuns, amI erecled lrdde and ulher uarriers tu prolecl them.

That allowed the robust and more open economies of Silicon

Valley and Bangalore to grab the lead in software services,

Internet technologies, and other related industries of the future.

Thanks in large part to those misguided industrial policies on the

supply side of the ledger, japan's economy continues to stagnate

-and its technology firms remain laggards in the Internet

revolution.

The Red Menace, Reconsidered

Another fallacy embedded in the Sputnik conceit is that China has

already matched America's innovation prowess and is set to

surpass it. In fact. even conceding all the gains made by emerging

markets around the world, the United States remains the

heavyweight champion of innovation. Whether it is by traditional

measures, such as spending on research and the number of patents

registered, or less tangible but more important ones, such as the

number of entrepreneurial start-ups, levels of venture capital

funding, or the payback from new inventions, the United States is

invariably near or at the very top of all relevant global rankings.

There is more competition at the top of those rankings these

days, but there are many reasons to think that the U.S. economy

will remain on top for quite some time yet. While it is true that

Asia will probably surpass the United States in absolute research

spending and sheer numbers of technical graduates, there are

reasons to be skeptical about some of the foundations of Asian

innovation. In Advantage, a well-researched book released in

201 1 , Adam Segal of the Council on Foreign Relations argues

that America's "unipolar moment" in the global economy may be

over, but that Asia's rise does not necessarily foreshadow the

decline of the United States. He pOints to evidence that challenges

the quality of the many patents, papers, and engineering degrees

seen in India and China.

Research done by Vivek Wadhwa, an entrepreneur turned

academic, has debunked various myths built up around Asian

engineering prowess. In work done with colleagues at Duke

University a few years ago, he showed the claims that China and

India were graduating far more engineers than the United States

were wildly overstated. More important, while some schools,

such as the Indian Institutes of Technology, produce world-class

graduates, his research suggests that a number of the degrees

issued from other Indian engineering schools are of poor quality.

Proof of that comes from the unwillingness of multinationals and

high-end local employers to accept graduates with those degrees.

Also, many firms, such as the Indian software giant Infosys, are

forced to spend fortunes retraining their incoming employees with

local engineering degrees. When one considers the quality of

engineering talent, argues Wadhwa, the United States remains on

top.

Much has also been made out of China's dramatic rise in the

league table of intellectual property rights. Not so long ago, the

country was known more for counterfeit drugs, pirated CDs, and

patent cheats than for original innovation. Yet consider this

headline from a Thomson Reuters bulletin in late 2010: �China

Poised to Become Global Innovation Leader." The publishing

firm's researchers surveyed the patenting activity of a number of

countries, from the developed world's giants to China and Korea,

and concluded that the total volume of first-patent filings in China

shot up at an annual growth rate of 26 percent from 2003 to 2009;

the patenting rate of its nearest rival, the United States, grew at

only 5.5 percent during that period. The outfit predicted that

China will overtake Japan and the United States to be the global

patenting leader soon. Sounds impressive, until one asks about

the quality of those patents. Look closely and it turns out that

about half of the patents filed by Chinese firms in 2009 were so­

called utility model patents, which Thomson Reuters itself

describes as �less-rigorous, more affordable forms of patents"

that provide ten years of protection versus twenty years for

invention patents. Again, that suggests that claims of America's

imminent demise in this area are to be taken with a grain of salt.

That is not to say that China lacks ambition, resources, or

seriousness in its quest to become an innovation powerhouse.

Quite the contrary, in fact. The latest five-year plan from

8eUing's technocracy puts �indigenous innovation," by which it

means creating value through homegrown invention rather than

merely copying or stealing, at the top of the country's economic

priorities. This is a huge problem, and one that worries many

foreign technology companies. Some are so keen to get access to

the Chinese market that they agree, under intense pressure, to

share their precious intellectual property with local partners.

Many in the aerospace industry say GE caved in this way with a

controversial avionics deal it struck with Chinese partners

recently, but Jeff Immelt is adamant that such is not the case; in

his view, the deal was worthwhile because it secures his firm a

powerful position in the country's booming aviation industry.

Intel does both manufacturing and research in China, but Justin

Rattner, its chief technology officer, confirms that his firm

forbids cutting-edge technology rour crown jewels," he calls

them) from entering that country.

The Chinese leadership is putting the squeeze on foreign

technology firms precisely because it understands how far behind

the West its technology firms are. That is not to dismiss the

amazing contributions being made by its frugal innovators, of

course, but by definition the frugalistas described earlier in this

book start at the bottom of the value chain before working their

way up to such elaborate technologies as the latest jet engines.

Thal is why the Beijing guvemmenL's guals include a desire Lu

improve the economy's competitiveness by directing it toward

technology ownership and upgrading the structure of exports

from low-cost manufacturing goods to higher-value-added

products and services. By building up the innovative capacity of

local firms, the government hopes to reduce the dominant share

of high-tech exports commanded by foreign-owned firms in favor

of local ones.

All that is necessary because locals know that China still has a

long way to go to match the innovation ecosystem of the United

States. In fact, the same Intel poll that showed Americans to be so

anxious about a rising China revealed that more than 80 percent

of Chinese reached by pollsters believe that the United States is

firmly in the global lead.

The DECO recently examined China's innovation policies and

potential in great detail and concluded that while the country is

already a major player in science and technology, its output still

falls short of the levels in DECD countries with similar levels of

R&D expenditure. This inefficiency, argue the agency's experts,

pOints to broader deficiencies in the policies and governance

system used to promote innovation as the country moves from a

planned economy to something resembling a market-based one.

While acknowledging the country's dramatic increases in

research spending and levels of patenting, the experts observe that

these have "yet to translate into a proportionate increase in

innovation performance." That is in part because the ability of the

business sector to make productive use of all that investment in

R&D is constrained by lack of proper infrastructure, talent, and

culture. That is in sharp contrast with the United States, which

does much better in speeding inventions out of academic and

government laboratories into the marketplace (though, it must be

noted, it could do still better).

China's ambition of becoming the world's innovation

superpower faces other obstacles too. R&D money is only one

part of what it takes to kick-start a modern innovation economy.

The country's norms on corporate governance, enforcement of

intellectual property rights and antitrust laws, and financing of

R&D are all not up to international standards yet. With small

exceptions such as the nanotechnology sector, the country's basic

research efforts are not yet well connected with its technology

development juggernaut. The DECO also found that the country's

industrial policies have created disconnected islands of

innovation in various regions or subsectors, but too few

interconnections between the various bits of this archipelago.

That limits the spillovers beyond the borders of those islands and

creates too great a physical separation between knowledge

producers and potential users.

The upshot is that while China is clearly an ambitious rising

power, there is little basis to think that it has even come close to

surpassing America's innovation prowess. The DECO's most

sensitive recommendation for China helps explain why. Though

acknowledging that the country's government does need to play a

role in improving such things as corporate governance, regional

disparities, and environmental protection, which the markets will

not tackle on their own, the experts insist that all-knowing central

planners should actually do much less in many areas. China must

adjust the role of the government, insists the agency, by

�overcoming the legacy of the planned economy by encouraging

changes in the attitudes and methods of work of government

officials so as to allow market forces, competition, and the private

sector to have a greater role."

That insight points to the third problem with the Sputnik

analogy: it puts policy makers on the slippery slope to the failed

interventionist approaches of the past, like the heavy-handed

industrial policies adopted by many countries back in the 1970s.

Keen to get America's innovation mojo back, Barack Obama

used his State of the Union speech in 201 1 to declare this a new

Sputnik moment. But China's rise is that of a gradual and

mutually beneficial tide, not a single aggressive act or specific

blow to the United States. What's more, the moon shots were a

costly and centralized technology push (the Apollo effort cost

some $150 billion in today's money, on some estimates) that is

entirely unsuited to twenty-first-century models of innovation.

Robert Solow, the Nobel Prize-winning economist,

acknowledges that the United States must improve the

productivity of its economy. The way to do this best, he explains,

is to "encourage innovation in sectors with large and growing

markets, such as energy." The centralized Apollo approach

worked for getting a man on the moon and back safely, costs be

damned, but it is entirely inappropriate for the clean energy

challenge. Ensuring that seven billion people across the globe get

access to safe, clean, affordable, and convenient energy services

requires the nimble interplay of policy, markets, technology, and

consumers.

Yet most of the Asian countries hoping to challenge the

innovation supremacy of the United States have strong,

government-led innovation policies in place. As in the case of

Singapore and Korea, these are often technocratically brilliant.

However, innovation is not in its essence a top-down process, and

so this will not be enough for sustained success. Many of these

countries lack America's resilient, open, and risk-taking culture.

China would do well to learn from the experience of state

planners in Europe who also have tried to engineer innovation

policies to compete with the United States. They have discovered

that the American approach, for all its inadequacies, fares better

than the brittle, centralized innovation policies that have largely

failed across the Atlantic.

The Dangers of Dirigisme

The recent scene in Salzburg was one that Joseph Schumpeter and

Peter Drucker surely would have approved of. Several dozen

leading government officials and academics from around the

world gathered at Schloss Leopoldskron, a spectacular rococo

palace located on the shores of an idyllic lake. They came not for

the fresh Alpine air, the hearty Austrian fare, or even the hills

alive with the sound of music. It was for a conference organized

by the Salzburg Global Seminar, a European think tank, to

discuss what they could do to turn their economies into

innovation powerhouses.

Holding such a meeting in the heart of Europe seemed only

fitting-and not just because Schumpeter and Drucker, the two

great theorists of innovation. both hailed from the region. After

all, it was also a European, France's Georges Doriot, who

invented venture capital during his time teaching at Harvard. And

it was another Frenchman, Jean-Baptiste Say, who coined the

word entrepreneur two centuries ago to describe the plucky

upstart who "shifts economic resources out of an area of lower

and into an area of higher productivity and greater yield."

Yet the star of the show was the United States. Everyone

wanted to learn how Silicon Valley was created and how it has

managed to keep its edge despite various booms and busts. Asia

also made its mark, with innovation gurus from places such as

Singapore bragging about how many billions of dollars they are

spending on technology parks, tax breaks on foreign investment,

and scholarships for their bright young things to go to MIT and

Stanford.

So what about Europe? The blunt answer is that the old

continent is something of an also-ran when it comes to

innovation. That does not mean the region has no innovative

companies-it certainly has a few in some areas, especially retail

and financial services, with firms such as Zara, a Spanish fast­

fashion chain, and Direct Line, a British online insurer. But these

tend to be exceptions. It is not much of an exaggeration to say

that, aside from mobile telephony, Europe has not come up with a

globally disruptive innovation in decades-although Skype, an

Internet telephony firm that is now part of Microsoft once looked

like it might qualify.

Europe's innovation malaise is the result of a complex mix of

factors. Some places, such as Ireland, Finland, and parts of

Scandinavia, are doing better than others (or at least, in Ireland's

case, did so before the recent financial crash). And Cambridge,

England, can reasonably claim to have created Europe's best

innovation cluster, albeit one that falls far short of Silicon Valley.

The main thing holding back continental Europe is that it is a

lousy place to start a new company. It can cost a lot of money and

it takes too long to set up a business. According to the World

Bank's influential annual �Doing Business" report, government

red tape means it takes nineteen days to open a business in

Germany. That is certainly better than the twenty-three days it

takes in Japan, but it is much more cumbersome than the six days

it takes in the United States or the mere three it takes in

Singapore.

In 2006, venture capitalists invested only about $9 billion in

the European Union, while their American counterparts splashed

out some $45 billion on new ventures. The link between venture

capital and innovation is a strong one. Samuel Kortum and Josh

Lerner, two American academics, have shown that "a dollar of

venture capital could be up to ten times more effective in

sLimulaLing paLenting Lhan a dullar uf Lraditiunal corpuraLe R&D."

They scrutinized twenty manufacturing industries between 1965

and 1992 and found that the amount of venture capital money in a

sector dramatically increased according to the rate at which

businesses in that sector took out patents. From 1982 to 1992,

they calculated that venture capital funds amounted to just 3

percent of corporate R&D but 15 percent of all industrial

innovations.

It is true that patents have become less important in many

industries and so they are an imperfect proxy for all innovation.

And in some cases venture capital funds will follow rather than

create innovation. Nevertheless, patents are still widely used, and

Kortum and Lerner successfully validated their results with other

measurements too.

But surely innovation and entrepreneurship are not the same

thing? Following the most useful definition-that innovation

brings to the marketplace fresh thinking that creates value for a

company, for its customers, and for society at large-someone

who opens yet another corner cafe may be a successful

entrepreneur but not much of an innovator. The ones worth

paying attention to are a special type of innovative entrepreneur

who embraces new ideas and has the ambition to scale them

qUickly. These are the people who are able to carry out the

creative destruction that Schumpeter marveled at. In Europe they

are still too thin on the ground: too many Europeans opt for

comfortable jobs working for Siemens or Electricite de France

rather than the risk and bother of starting speculative new

companies.

This is worrying for Europe. National champions and

incumbents are not disruptive innovators. Upstarts are. From

1980 to 2001, all of the net growth in American employment

came from firms younger than five years old. Established firms

lost many jobs over that period and dozens fell off the Fortune

500 list. In fact, big corporations have been dying off and

disappearing from stock market indices. Most of the dynamism of

the world economy comes from innovative entrepreneurs and a

handful of multinationals (including CE, IBM, and P&C, all of

whom have stayed on the Fortune 500 list for many decades) that

constantly reinvent themselves.

Carl Schramm, president of the Kauffman Foundation, which

studies entrepreneurship and innovation, says that �for the United

States to survive and continue its economic and political

leadership in the world, we must see entrepreneurship as our

central comparative advantage. Nothing else can give us the

necessary leverage to remain an economic superpower." A recent

study funded by his think tank reviewed jobs data from the U.S.

Census Bureau from 1977 to 2005 and found that during this

period existing firms were net job destroyers, losing one million

jobs net combined per year. In contrast. in their first year. new

firms added an average of three million jobs. Because start-ups

that get going without government help are almost the only real

source of job growth in the United States, the foundation

concludes that government industrial policies aimed at preserving

jobs at big companies or luring larger, established firms into a

particular region will inevitably fail. Such policies are �doomed

not only because they are zero-sum, but because they are based in

unrealistic employment growth models."

The U.S. economy is not a free market paragon, to be sure.

The Internet and related industries have all benefited from the

spillover effects from government funding of universities and

from military spending. However, it is wrong to think those

factors alone explain American dynamism. The Soviet Union

spent lavishly on its military and space programs during the Cold

War, but because its economic system was ossified, there were

few spillover effects.

What is more, Europe itself spends a lot of money on higher

education and has a number of top universities with leading

academics and researchers who produce excellent papers and win

Nobel Prizes. The problem is that their ideas tend to stay in their

iVory towers. Part of the explanation is that innovation is still seen

as being driven by government spending on R&D, when in fact

most innovation now happens in services and business models.

Studies have shown that companies that outperform their peers

put a much bigger emphasis on business model innovation.

Indeed. that is a mistake that even the great Clay Christensen

originally made. When he first developed his ground breaking

theories on disruptive innovation, he focused on the specific

technologies in question-such as inexpensive computer disk

drives, for example. that ultimately drove out the expensive

incumbent storage technology-that he believed to be key. But as

he researched the topic further. he realized that it was not the

gadget or gizmo but the combination of new technologies with

radically different business models that added up to disruptive

innovation.

That is a lesson that many officials in Europe have not fully

absorbed. The European Union has an official target to raise

government R&D spending, and there is much angst over patents

-an obsession that Japanese planners share. A recent edition of

Science, Technology and Innovation in Europe. an annual report

by the statistical arm of the European Commission, reveals

exactly what is wrong. It is chock full of figures, broken down by

region and industry, of research spending, patents filed. scientists

employed, and other important-sounding variables. The problem

is that these are all inputs into the innovation process. not outputs.

There is only a cursory discussion of venture capital and no

attention paid at all to entrepreneurship-the most powerful way

to turn ideas into valuable products and services.

The World Is Spiky

Another problem is that European officials. like government

bureaucrats everywhere, are obsessed with creating geographic

clusters like Silicon Valley. The French have poured billions into

poles de comp(ititivite, and many others are doing much the same.

There are dozens of aspiring clusters worldwide, nicknamed

Silicon Fen, Silicon Fjord, Silicon Alley, and Silicon Bog.

Typically governments pick a politically influential part of their

country, ideally one that has a big university nearby, and provide

a pot of money that is meant to kick-start entrepreneurship under

the gUiding hand of benevolent bureaucrats.

It has been an abysmal failure. The high-tech cluster in and

around Cambridge. England. is the most often-cited

counterexample. Hermann Hauser of Amadeus Capital, a leading

British venture capitalist (who, curiously, also hails from

Austria), is an optimist: �Silicon Valley is still the lead cow, but

Cambridge is the best in Europe." Perhaps, but that is faint praise.

The main problem, argues Georges Haour of IMD, a Swiss

business school, is that Cambridge suffers from the Peter Pan

complex: "Inventors never want to grow up, they are happy with

modest success. " One veteran of the city's start-up scene even

argues that its success came "in spite of, not because of,"

government and university support.

Experts at INSEAD looked at efforts by the German

government to create biotechnology clusters on a par with those

found in California and concluded that �Germany has essentially

wasted $20 billion-and now Singapore is well on its way to

doing the same." A World Bank assessment of Singapore's

multibillion-dollar efforts to create a "biopolis" reckoned that it

had only a fifty�fifty chance of success.

The real problem holding back innovation in many countries

is too much government in the form of red tape and market

barriers. Planning restrictions have prevented the expansion of

Ahold and other highly efficient retailers in France. Closing hours

in several EU countries also act as an inhibitor. Studies of Japan

and South Korea suggest the heavy hand of government is even

more stifling in those countries: outside a small, highly

competitive group of export industries (cars, electronic goods,

and steel). inefficient, coddled domestic sectors are slow to adopt

new technologies or business practices.

In the end it is companies, not regions, that are competitive.

So the question for government is how to attract many

competitive firms. That should throw cold water on cluster-mad

politicians. It also points to sensible prescriptions to promote

innovation.

First of all, stop spreading money around in politicized fashion

trying to clone lots of Silicon Valleys. Steven Koonin, an official

in the U.S. Department of Energy who served previously as chief

scientist at BP and as the provost of the California Institute of

Technology, has said that European countries spread research

funds too thinly anyway. Often this leads to money being divided

up on a political basis, with funds going to institutions based on

influence in Brussels and European capitals rather than on the

promise and merit of a particular research effort. The United

States has no problem with big awards, so innovators can achieve

scale. That is precisely what BP has done, setting up a $500

million research alliance run by the University of California at

Berkeley to look into advanced biofuels.

However, there is an even more important factor than money:

culture. Nokia's success was not the result of farsighted planning

or subsidy by the government of Finland. One Nokia executive

confides: �The biggest boost to our firm was the deregulation that

followed the second world war and the government's avoidance

of protectionism." One of the most innovative things Nokia did

was to spot that the handset could also be a fashion accessory.

And coming from such a small and open market. it was forced to

think globally.

Second, governments keen to promote innovation need to look

out for market distortions and overregulation that can be stripped

away. This is not to argue for no regulation: as the latter part of

this chapter argues, there is actually a pressing need for a more

muscular, but carefully circumscribed, role for government. The

problem is that entrepreneurs can face an uphill battle legally, not

just culturally, in many countries. The bankruptcy code in many

places is excessively burdensome, even banning some failed

entrepreneurs from running a company for years. Contrast that

with America's Chapter 1 1 bankruptcy proceedings, which

qUickly redeploy both the bankrupt firm's physical assets and the

creative energies of its leaders.

In India an overbearing system known as the Licence Raj

choked the creativity out of most sectors of the economy for

decades, through a mix of overregulation, petty corruption, and

centralized planning. But the bureaucrats in Delhi did not

understand computer software well enough to regulate it. And by

the time they caught on, innovators in Bangalore and other

corners of India had created a world-class industry. A similar

story may be unfolding qUietly in parts of China. Adam Segal has

studied high-technology firms in Beijing, Shanghai, Guangzhou,

and Xian. His research shows that smaller entrepreneurs in the

private sector-sometimes called bamboo capitalists-are likely

to be more innovative than bigger ones reliant on government

largesse.

All across the developing world, where chaotic and corrupt

rule can impede growth in myriad ways, extraordinary innovators

are starting to flourish wherever they are not choked off by

bureaucrats or fat cats. Freedom from �legacy," in the shape of

stranded assets such as fixed�line telephony or centralized power

grids, has liberated African entrepreneurs and allowed them to

leapfrog with technology-from having no electricity to using

solar cells, for instance. So where does that leave the present

Goliath of innovation, the United States?

Patching the Holes in the American Vessel

John Kao is concerned about the United States losing its global

lead and becoming �the fat, complacent Detroit of nations." In his

book Innovation Nation, he points to warning signs, such as the

United States' underinvestment in physical infrastructure, its slow

start on broadband, its pitiful public schools, and its frostiness

toward immigrants since September 1 1 . 200 I-even though

immigrants have provided much of America's creativity. He even

stoutly defends his description of the rise of Asia's innovators as

a silent Sputnik. What the United States needs, he reckons, is a

big push by federal government to promote innovation, akin to

the Apollo space project that answered Kennedy's call and put a

man on the moon.

Curt Carlson puts it in starker terms: �India and China are a

tsunami about to overwhelm us." As head of California's

Stanford Research Institute, which was founded in 1946 by the

university to foster innovation and economic development in the

region, Carlson knows the strengths of Silicon Valley from

firsthand experience. Yet here he is insisting that American

information technology, services, and medical devices industries

are about to be lost. �I predict that millions of jobs will be

destroyed in our country, like in the I980s when American firms

refused to adopt total quality management techniques while the

Japanese surged ahead." The only way out, he insists, is "to learn

the tools of innovation" and forge entirely new, knowledge-based

industries in energy technology, biotechnology, and other

science-based sectors.

These thoughtful gurus are right to sound the alarm bells, as

there are signs that the United States' innovation ecosystem needs

attention in areas such as education and basic infrastructure.

However, given the dismal failure of industrial policies in the

past, one should still remain skeptical of any calls for aggressive

government intervention across the board. The Council on

Competitiveness, an influential coalition of leading business

interests, recently concluded in a report that, by and large, the

outlook is bright for the United States. Yet the same council's

innovation task force also gave warning that other countries are

making heavy investments that threaten to erode the U.S.

position. It called for a big push in four areas: improving science,

engineering, and math education; welcoming skilled immigrants;

beefing up government spending on basic research; and offering

tax incentives to spur U.S.-based innovation.

These are mostly sensible recommendations because they

focus on those framework conditions and bits of infrastructure

that the market would not provide on its own. Still, governments

should tread carefully even in these areas. Consider the call to

beef up American technical education. This is sensible, but some

go too far in dismissing the value of arts, design, and other

creative parts of the curriculum. Bill Gates is firmly in the

technologists' camp, exclaiming, �If we lose engineering, I don't

know what's left!" Steve Jobs, in contrast, argued that the United

States is flourishing because firms such as his, unlike Asian

rivals, have the creativity and flair to integrate low-value

components manufactured cheaply elsewhere into gorgeous and

lucrative devices such as the iPad. The United States clearly

needs to improve its education system, but the right way forward

would provide holistic training that balances stronger technical

and vocational education with more creative fields that encourage

critical and integrative thinking.

Just as with education reform, the case for immigration reform

is overwhelmingly strong in the United States. Many studies have

shown that immigrants have played a central role in the country's

economic vitality-especially well-educated engineers from India

and China. Vivek Wadhwa estimates that from 1995 to 2005, 52

percent of Silicon Valley's technology and engineering

companies were founded by immigrants. Most came to the United

States to study and stayed on to work. That group also filed a

quarter of the country's global patents.

The prohlem is thHt Hfter 9/1 1 , AmerkHns tmneci frosty towHrci

such folk, making it harder for them to stay on after studies to

work. Gates pOints out the absurdity of subsidizing the computer

science degrees granted to foreign graduate students at top state

schools such as the University of California at Berkeley only to

chuck those brilliant immigrants out of the country when they ask

to work and pay taxes in the United States after graduation. This

chill came just as the economies back home skyrocketed, making

it much easier for the new generation of hungry young world­

beaters from those emerging markets to skip America and seek

their fortunes back home instead, Nativists and xenophobes may

cheer, thinking this means more jobs for red-blooded Americans,

but that is wrong, Wadhwa points out that this simply means

�there will be fewer start-ups, that entrepreneurship will boom

instead in countries like India and China, and that Silicon Valley

will [ace unprecedenLed cUllipeliliun [rulll Allierican-educaled

and -trained talent" that is forced to go home. In other words,

unless the United States reforms its immigration laws quickly, it

is about to lose the extraordinarily valuable gift of the world's

most talented and enterprising minds that its economy has

benefited from these past decades.

The recommendation from the Council on Competitiveness

that the United States should boost its investment in research and

development is also sound, but again the devil is in the details. If

such investment is structured as technology-neutral policies that

do not favor one particular firm or technology over another-for

example, via stable, long-term tax policies that encourage

corporate spending on research-then they are a good idea. So

too are reforms of the way new inventions, often funded with

government money, make their way from academic laboratories

to the market. At the moment, the law gives the technology­

licensing offices at universities too much power over what ideas

make it out of the lab and into the office (though a Supreme Court

case in mid-201 1 suggested big changes may be on the way that

favor innovators over administrators). Giving faculty and

employees of government laboratories greater discretion over

commercialization would transform a sclerotic, centralized

process into a vibrant marketplace where scientists will have

every incentive to turn obscure inventions into world-changing

innovations.

That pOints to a related area where government action could

help shore up one of America's traditional strengths: encouraging

innovative entrepreneurship. Robert Litan, a scholar affiliated

with the Kauffman Foundation and the Brookings Institution,

coauthored an influential book some years ago called Good

Capitalism, Bad Capitalism that argued that the most innovative

economies have a mix of nimble start-ups (which come up with

breakthrough innovations) and dynamic big firms (which do

incremental improvements and scale up those breakthroughs). In

contrast, the least innovative economies tend to have few start­

ups and lots of state interference in markets. But he believes that

the advantages held by big firms are eroding fast just as

globalization, Web-enabled services, crowdsourced capital, and

other powerful changes in the global economy are tilting the

playing field in favor of entrepreneurs. While in the past most

start-ups targeted local markets, Daniel Isenberg of Babson

College argues persuasively that today's start-ups can become

�micromultinationals" from day one thanks to the Internet and

global supply chain management tools.

In his new book, Better Capitalism, Litan argues that the most

dynamic and high-growth economies of the future will be those

that encourage high-growth entrepreneurship. How, exactly? "I'm

not a fan of clusters; state gUidance usually gets new technologies

wrong . . . governments should get the basic infrastructure right

and let capitalism work," he says. Still, he believes America

needs to stoke the start-up bonfires by opening up immigration,

investing in science and technology education, liberating

intellectual property from academia, and fixing the country's

fiscal mess through a value-added tax on consumption that would

ease the burden of taxes in other areas like capital gains.

That is a sensible set of recommendations. And the industry

lobbies are also right to say that there are important things the

U.S. government must do to improve the country's innovation

framework and stay ahead of the global competition. Where the

prescriptions from such groups tend to go awry is when they

argue for specific subsidies or tax breaks for favored industries

(such as supporting only U.S.-based innovation in today's world

of global creative networks). After all, the forces of creative

destruction must be allowed to work their magic.

The Secret of Silicon Valley

Resilience in the face of disruptive forces gave Silicon Valley the

edge over its nearest high-tech rival, Boston's Route 128

technology corridor. Both clusters were riding high until the

personal computer and distributed computing changed the market.

Firms went through wrenching change, but those in northern

California, such as Hewlett-Packard and Xerox, emerged stronger

than those near Boston, such as Digital Equipment and Wang­

which no longer exist. As AnnaLee Saxenian of the University of

California at Berkeley has shown, Silicon Valley's champions

were nimble and networked, but those on Route 128 were brittle,

top-down bureaucracies.

Sergey Brin insists that �Silicon Valley doesn't have better

ideas and isn't smarter than the rest of the world" but thinks it has

the edge in filtering ideas and executing them. That magic still

happens and attracts people from around the world who are �bold,

ambitious, determined to scale up, and able to raise money here

actually to do it." Brin points to Elon Musk, founder of Tesla and

SpaceX, as an example.

Musk moved from South Africa and eventually settled in

California to make his fortune. Musk says his equation for

success is drive times opportunity times talent. Unlike many

countries, he insists, America is never satisfied with the status

quo. "There is a culture here that celebrates the achievements of

individuals-and it is too often forgotten in history that it is

individuals, not governments or economic systems, that are

responsible for extraordinary breakthroughs," he says.

That explains why innovation policies should carefully

circumscribe the role of government. Liberty is a powerful force.

In the past, Brin notes, innovation was dominated by elites-the

�wealthy gentlemen tinkerers" of Victorian England, for example

-who had privileged access to information, money, and markets.

But America was different. Harold Evans, the author of They

Made America, observes that the essential enabler of U.S.

innovation prowess was �political innovation . . . a free society."

Britain actually invented many marvels of the modern age­

radar, penicillin, and the jet engine, among many-but it was

America that commercialized these inventions at scale and turned

them into genuinely valuable innovations. Evans thinks a key

factor was the United States' system of universal education,

which developed a broad scientific and technological workforce.

Britain, in contrast, had an elitist and limited educational system.

And these days. of course, much innovation happens from the

bottom up and the inside out. That suggests an important but

radically different role for government going forward.

A Policy Manifesto for the Age of Democratic Innovation

It is clear that the need for innovation has never been greater. As

the world economy struggles to recover from the global financial

crisis, governments are casting about for strategies to revive

growth. They are also struggling to come up with solutions to

difficult global challenges ranging from climate change and the

threat of pandemics to the demographic and health burdens (think

costly chronic diseases such as diabetes and heart disease)

imposed by older, fatter, and sicker populations.

Accelerating the pace of innovation would certainly help

countries deal with both problems. Because most of the output of

rich countries now comes from nonmanufacturing sectors, where

brain trumps brawn, boosting innovation offers a promising way

to increase productivity and spur future growth. And even in

traditional asset- and legacy-heavy industries such as

manufacturing, the next chapter shows, investing in the

knowledge component of those businesses can lead to a

renaissance. Breakthrough technologies and disruptive business

models, such as the spread in Africa of banking and medicine via

mobile telephony, can make it much easier to tackle those thorny

challenges.

Governments everywhere are now coming up with innovation

policies they claim will boost national competitiveness and tackle

environmental and other social goals. The U.S. government has

bailed out GM and Chrysler, for example, and is throwing money

at batteries, electric vehicles, and other energy technologies.

Various European governments are following the example of

their French counterpart, which is now subsidizing such

�strategiC" industries as toy making. Yes, really.

As that example suggests, a lot of things done in the name of

innovation are simply a sham. Many of the national innovation

strategies implemented in the wake of the financial crisis merely

subsidize favored technologies or prop up uncompetitive national

champions. In the worst cases, they are thinly disguised attempts

at protectionism. Though dressed up in pro-market language, they

are mostly a throwback to the failed industrial policies of the

1970s and 1980s.

These policies are far likelier to retard innovation than to spur

it. That is because innovation is at heart a bottom-up process-a

Schumpeterian dance of risk, failure, resilience, and reward that is

foreign to all-knowing bureaucrats but second nature to

entrepreneurs. Greed not only is good but also can do great good

-if, that is, there are clear incentives to tackle the wicked

problems of society.

But first governments must step back a little. History shows

that official attempts to pick technology winners, no matter how

initially promising, usually end in tears. Three decades ago, the

French government developed Minitel, a national

communications network that allowed users to send messages,

book train reservations, and so on. This was a popular invention,

and for its time a clever one. The snag was that bureaucrats

insisted on keeping this a closed system, even after it became

clear to everyone else that the future belonged to open networks

such as the Internet. Minitel inevitably proved a dead end, and

France lost out in the global Internet race.

The United States has its embarrassments too. In the wake of

the 1970s oil shocks, the Department of Energy decided to invest

heavily in producing synthetic petroleum, to end the country's

addiction to foreign oil. Predictably, the project proved a costly

flight of fancy: billions of dollars and many years were spent on

this technology dead end. but not a single barrel of �syn-crude"

ever reached the market. The current version of that boondoggle

is the enormously damaging subsidy given to com ethanol. This

pleases the politically powerful farm lobby, but this perverse

policy has diverted corn from food markets (fueling food price

hikes that have hurt the very poorest) while also harming the

environment (since com ethanol, unlike the virtuous Brazilian

sugarcane variety, is not green).

These policies have failed because. despite the best intentions

of central planners. top-down innovation does not work as well as

the bottom-up variety. This is especially true in energy. according

to a comprehensive review of energy innovation coauthored by

Richard Newell, currently head of the U.S. Energy Information

Administration. He pOints to the current boom in the shale gas

industry. which is the most extraordinary development in

American energy in decades, and notes that it was not predicted

by government planners. Newell's study shows that energy

innovation is driven not by short-term bursts of government

support but chiefly by bottom-up efforts and market forces.

Indeed. the key to the shale breakthrough was not government

subsidies for new technology but the clever and diligent

application by market actors of existing technologies to new

situations.

The top-down approach was always misguided, but it is

absurdly out of place given the speed at which innovation

happens today. Thanks to globalization and the rise of the

information economy, new ideas move to market faster than ever

before. This is in large part due to the shift from top-down

innovation (of the sort made famous by AT&T's Bell

Laboratories and other secretive corporate silos) toward more

open, networked. and user-driven models of innovation. Think,

for example. of the iPod: the research behind it was done by firms

the world over, but Apple has reaped huge rewards from its skills

in deSign, marketing, and systems integration.

Innovation is truly a global enterprise today. Much of the

value created by firms is in the form of intangibles such as

knowledge networks and open business models. Yet most

governments cling stubbornly to national industrial policies that

offer perverse incentives for local firms to squander resources on

parochial technologies and outmoded business models. That

suggests that innovation works best when government does least.

However, that is not to say that governments should do

nothing at all. On the contrary. there is an essential, but carefully

circumscribed, role for the state in fostering innovation. Despite

the recent downturn, governments must continue to invest in the

handful of areas that fortify an economy's capacity to innovate­

and therefore, to grow more robustly-in the future.

For a start, only governments can ensure that the framework

for innovation is sound. America's success at maintaining the rule

of law, encouraging risk capital, and applying pragmatic

bankruptcy codes all played a role in the spectacular rise of

Silicon Valley, for example. Governments should also encourage

investment in what the DEeD calls "knowledge-supporting

infrastructure," which ranges from smart electricity grids and

broadband Internet networks to basic research and university

education. That principle argues against massive cuts in education

and infrastructure, for example. It would be far better for cash-

strapped governments to cut spending on entitlement programs

than to slash vital investment in the enablers of long-term

economic growth.

But investing in the innovation framework must not mean

picking technology winners. A better approach is the use of

externalities pricing for such problems as carbon pollution, as it

sets a societal goal but allows market forces-and, yes, greed-to

find the most efficient way to solve the problem. Another

promising advance is the official use of incentive prizes. Aneesh

Chopra. the White House's chief technology officer. argues that

new technologies and a new mind-set are enabling innovation in

government itself. One example involves initiatives to put much

previously inaccessible public information up on the Internet,

which is democratizing government data. Another way

government can help, he argues, is by pushing for common

standards and transparency in such areas as electronic health

records. He also argues that government must act as a catalyst for

greater research collaboration among academic and private sector

actors at the precompetitive level.

These efforts get an endorsement from an unexpected quarter:

Craig Newmark, one of the true pioneers of the Web. He founded

Craigslist.org, which is the online bulletin board used by

countless millions to exchange goods and services. The upstart

used to throwing rocks at the establishment has, it turns out, been

advising members of Congress and the Obama administration on

openness, networking, and what bureaucrats like to call

Government 2.0. Newmark believes Gov 2.0 can become a big

deal: "By exposing data, by fixing a lot of business processes, by

using the technologies of the private sector, a lot of things are

being made to work in Washington, and no one is talking about

it." He is convinced that the tools of social media can be applied

to civics, to rebuild what he calls "the immune system of

democracy." He believes these remarkably disruptive tools may

even transform government and its relationship with civil society.

These efforts at openness are to be applauded. But, sad to say,

most of what governments around the world do in the name of

innovation does not resemble such efforts in the least. That is why

the biggest boost governments can give to national

competitiveness is to stop doing some things. The first thing is to

end perverse policies that discourage collaboration outside one's

own firm or country. The tax credit offered by the U.S.

government for corporate research is appropriately generous for

work done inside a firm's labs (and Congress should make this

stop-and-go policy permanent) but stingy if that same work is

done with, say, university researchers. In contrast, Canada's tax

law does not punish collaboration in this way.

The second thing is to stop creeping protectionism.

International coordination of technical protocols can be a good

thing: Europe's embrace of the GSM standard helped its firms

grab an early lead in mobile telephony, for example. However,

there are worrying signs that some proposals for technology

standards (for example, rules on smart grid protocols or electronic

health records) are really covert attempts to produce rules

favoring local technology firms. History shows that such efforts

can lock local firms into dead-end technologies and leave them

unable to compete globally.

The most important thing that countries must stop doing is

closing their doors to immigration. Flexible labor markets are

essential for a vibrant economy. Given the democratization and

globalization of innovation seen in recent years, companies must

be allowed to tap freely into the brainpower of billions of

innovators-in-waiting worldwide if they are to remain

competitive. Just as important, bright sparks from around the

world must have the freedom to pursue their studies and

professional ambitions, wherever in the world that may take

them. Studies of innovation clusters in Israel, Taiwan, and South

India have shown that the catalyst sparking the rise of those

aspiring Silicon Valleys was the constant flow of talented

researchers, entrepreneurs, and venture capitalists to and from the

actual Silicon Valley (which owes its own success in part to

immigration). Think brain circulation, not brain drain.

In sum, there are some useful things that government can do to

boost innovation. Most center around the framework conditions

that allow market forces to function properly so that the seeds

sown by innovative entrepreneurs fall on fertile soil. The next

chapter explores whether big companies can realign incentives so

that they too can tap into such innovation within their own ranks.

Given the dismal failure of past efforts at top-down innovation,

though, governments should approach even these policies with

humility. In the end, the best industrial policy is probably no

industrial policy.

8

Can Dinosaurs Dance?

The rise of nimble Asian competitors and the accelerating

pace of technological innovation are putting established

companies in a double bind. For the storied multinational

giants of the rich wOlJd, this is a battle for survival. Some

of the dinosaurs of the old economy will fall by the

wayside, but others may yet adapt and flourish. Some such

films are fighting the forces of change, but others making

everything from consumer products and cars to colas are

frantically figuring out the new tools and mles of global

innovation.

The best of the breed are finding ways to turn the

dismptive forces to their advantage. Some are

expeIimenting with reverse innovation, through which

Western films bIing innovations developed in emerging

maIiets back to their home tar!. Another weapon in their

arsenal is the stealthy bat sare spread of software,

infOlmation technology, and related hardware into every

nook and cra.nny of industries such as steel, cars, and

energy. By becoming more like infol7nation businesses,

which harness the Internet-fired explosion of customer

data through advanced analytics and business intelligence

strategies, traditionally stodgy companies hope to have a

fighting chance.

Learning the tricks of frugal engineeIing now emerging

from developing countries is essential for swvival, but will

Big Data really save Big Business? Actually. history shows

that most companies die off over time-IBM, which

celebra.ted its centenalY in 2011, is a rare exception-and

the pace of such creative destmction is accelerating. If big

films want to /JoUlish, they need to combine scale with

agility. To do so, they need to experiment and learn much

faster than in the past, thereby speeding up the "knowledge

turns " in their business.

That is because the digital revolution turns out to be a

double-edged sword. The transfOlmation of slow-moving,

bIicks-and-mortar industIies into knowledge businesses

does give them a renewed lease on life but it also exposes

them to disnlption from anywhere-meaning everyone

must innovate faster today. This chapter highlights the

successes achieved by nimble incumbents and plants red

/Jags on the pitfc-111s that have befc-l1len the insular and

lethargic as dinosaurs learn how to dance to a new tune.

Vinod Khosla and Larry Page, two giants of the New

Economy. are plotting to save the old economy. The two Silicon

Valley stars were chatting one evening several years ago at the

Googleplex. The crisis that Khosla was concerned about was

caused by carmakers' addiction to oil and the implications of that

for national security and the environment. �The energy and car

industries have not been innovative in many years because they

have faced no real crisis, no impetus for change." he insisted.

The two were plotting what they hoped would be the next

great technological revolution: the convergence of software and

smart electronics with the grease and grime of the oil and car

industries. This was an audacious goal, given that the entrenched

incumbents of asset-heavy industries such as the car business tend

to move slowly indeed. Khosla was kicking around his plans for

getting "chip guys" together with "engine guys" to develop the

clean, software-rich car of the future. Such breakthroughs happen

only when conventional wisdom is ignored and cross-fertilization

encouraged-� managed conflict." in his words.

Page had earlier hosted a gathering of leading

environmentalists. political thinkers, and energy experts to help

shape an inducement to get things moving: the Progressive

Automotive X Prize, unveiled in early 2008. The organizers

offered $10 million to whoever came up with the most efficient,

affordable, and sexy car to obtain very high fuel economy using

any form of energy. The winner, announced in 2010 after an

exciting global competition, was the Edison 2, an incredibly

aerodynamic vehicle that got over 102 miles per gallon of

gasoline-equivalent energy. The charitable arm of Page's firm

even shamed the established carmakers into investing in electric

cars by taking hybrid gasoline-electric vehicles. such as the

Toyota Prius, and proving that they could easily be turned into

safe and supergreen plug-in versions that can be topped up from

an electric socket.

Such pushes were necessary, as the dinosaurs initially refused

to budge. Khosla believes that clean cars, using advanced biofuels

or other alternatives, will come about only through radical

innovation of the sort that Big Oil and the Big Three automakers

avoid. Risk and acceptance of failure are central to innovation, he

argues, but these goliaths typically avoid both. �Big companies

didn't invent the Internet or Google, and much of the big change

in telecoms also came from outsiders," he adds.

But these men are from Silicon Valley, and Silicon Valley is

not America. It is tempting to dismiss such breathless talk of

revolution as just more hype from people who are seeing the

world through Google goggles. After all, go beyond the rarefied

air of northern California and the rules of gravity are no longer

suspended. The well-established industries they mock still move

at their usual but reliably glacial pace, right?

Well no, actually. Rapid and disruptive change is now

happening across new and old businesses. Innovation is becoming

both more accessible and more global. This is good news because

its democratization releases the untapped ingenuity of people

everywhere, and that could help solve some of the world's

weightiest problems. This will force the dinosaurs to dance in

order to survive-and, just maybe, provide a renewed lease on

life for the ones that come up with world-changing new ideas.

The seditious scene from the Googleplex also captures the

challenge this presents to established firms and developed

economies. For ages innovation has been a technology-led affair,

with most big breakthroughs coming out of giant and secretive

research labs, such as Xerox PARe and AT&T's Bell

Laboratories. It was an era when big corporations in developed

countries accounted for most R&D spending.

North America still leads the world in research spending, but

the big labs' advantage over their smaller rivals and the

developing world is being eroded. And research has found that

companies are getting diminishing returns on in-house corporate

research. Above a minimum threshold determined by the

particular industry in question, spending more on in-house

research and development has no correlation with any metric of

the firm's financial success. This suggests that for most

companies in most industries, merely pouring pots of money into

in-house research will not help in staving off disruptive

innovations: they must open up and radically reinvent their

innovation process.

However, for those companies with sufficient scale and long­

term planning horizons, there may be an argument for doubling

down on the traditional corporate research model. Bill Gates, ever

the contrarian. remains a big believer in this traditional approach.

He argues that open approaches are fine for incremental

improvements, but that if a firm is aiming to develop

breakthrough innovations such as the next generation of nuclear

plants-something Terra Power, a nuclear energy firm in which

he has a stake, is attempting-it needs serious in-house research,

patience, and deep pockets.

Visit the storied Bell Labs, now owned by the telecom

equipment manufacturer Alcatel, and you still find lots of

scientists and well-equipped laboratories on its leafy campus in

northern New Jersey-but these days they are mostly chasing

ideas that will produce winners in the marketplace, not Nobel

Prizes. GE has doubled its research and development spending

over the past few years, despite the global economic downturn,

and dramatically increased its spending on software. All this is

aimed at preparing the firm for the coming convergence of the old

economy and the New Economy.

That points to several of the big lessons emerging from the

experiences of established companies trying to cope with today's

Great Disruption. Large firms must find ways of retaining their

ability to scale good ideas-Immelt likes to say his firm isn't the

best at invention, but it is terrific at turning $50 million ideas into

billion-dollar businesses-while becoming much more agile. That

means bosses must push internal bureaucracies and hierarchies to

experiment more readily, failing faster and learning from

mistakes more gracefully. They must also be much more open to

ideas, including ones that are threats to existing business lines,

coming from unexpected quarters outside the firm.

What's more, it is not just stodgy industrial firms that must

learn to dance to a new tune: even high-technology firms that just

a few years ago were themselves disruptive innovators will soon

find that their comfortable perch is threatened by new and hungry

upstarts. A good example is Intuit. a California firm that shot to

prominence with TurboTax, Quicken, and other easy-to-use

financial software. Scott Cook, the firm's founder and current

boss, saw the inefficiencies, high costs, and customer frustrations

evident at traditional tax preparation businesses. By building a

simple, affordable, self-service tax preparation package, he did

for personal finance what Ray Kroc did for restaurants with

McDonald's.

That propelled Intuit into the ranks of billion-dollar

businesses, but Cook was not satisfied. In the mid-2000s, he

decided he needed to accelerate the firm's organic growth and

cast a wider net for new ideas lest his firm grow vulnerable to

disruption. To do this, he decided to move toward an open

innovation model of the sort long advocated by UC Berkeley's

Henry Chesbrough. This is easier said than done, he has

discovered. Early efforts at collaboration with outsiders hit snags

because employees were fearful of sharing intellectual property

(company lawyers had advised them that patent applications

might get �polluted" if outsiders were involved). Some

collaborators, for their part, thought Intuit was flirting with them

as a prelude to an acquisition bid. The firm's internal R&D teams

worried their jobs were about to be outsourced, and some

managers adopted a �not invented here" attitude.

To the firm's great credit, observes Chesbrough, Intuit stuck

with its efforts to open up its innovation process. When the effort

started, the firm took months to develop new ideas; recently, it

produced in a matter of weeks an Android app with Google for

online payments. When several new employees grew frustrated a

few years ago at the internal silos and lethargic pace of cross­

functional communications, they used the � 10 percent time"

granted them by the company to pursue any project they want

(3M and Google let their employees have 20 percent off for pet

projects) to create their own online tool. Not only does the entire

company now use Brainstorm, the resultant software, for

collaboration and knowledge sharing, but Intuit also sells this

serendipitous invention to such customers as GE, Netflix, and the

Wharton Business School.

Reflecting on his firm's progress, Cook says the hardest part

of teaching his dinosaur to dance was changing corporate culture:

�It requires a change to the standard process of development,

relying less on secrecy and IP protection and more on

collaboration-and no longer retreating to the old ways." In short,

even firms that were paragons of New Economy disruption a few

short years ago (think Google today, Facebook tomorrow) will,

like Intuit, confront the same forces that are now forcing

wrenching changes at the icons of the old economy.

Into the Looking Glass

Two decades ago, David Gelernter saw the coming convergence

of the old economy and the New Economy. In his visionary tome

Mirror WOlJds, he predicted that �you will look into a computer

screen and see reality . . . some part of your world-the town you

live in, the company you work for, your school system, the city

hospital-will hang there in a sharp color image, abstract but

recognizable, moving subtly in a thousand places." That sounded

like something out of Orwell or the dystopian Matrix movies to

some, which perhaps explains why the Unabomber tried to blow

him up.

Thankfully, the neo-Luddite terrorist failed, and the

curmudgeonly Yale professor continues to crank on. And

Gelernter's forecast that the digital world would converge with

the real world is fast coming true. The rise of intelligent

infrastructure and smart systems, which embed sensors into

everything and link up using wireless communications networks,

is indeed creating a digital version of reality. This raises

important questions about security and privacy, but it also means

that stodgy, asset-based industries such as steel, cars, and

shipbuilding are turning into information industries-and

therefore companies in those fields must innovate much faster

than in the past.

The embedding of intelligence into dumb systems is nothing

new, of course. For several decades, logistics firms and retailers

such as Walmart have been putting RFID tags and related

technologies into many products. This has made it possible for

them to track everything from the location of specific cargoes on

the freeways to identifying which specific size and variety of Jif

peanut butter has just gone out of stock in which aisle of your

local supermarket. But now, argue technology experts at

McKinsey, this trend is accelerating toward what has been called

the "Internet of things." "Embedded with sensors, actuators, and

communications capabilities, such objects will soon be able to

absorb and transmit information on a massive scale and, in some

cases, to adapt and react to changes in the environment

automatically. "

Why does this matter? Because, argue the McKinsey

futurologists, the spread of smart software and sensors into every

nook and cranny of traditional, unsexy industries will make

processes more efficient, give products new capabilities, and

spark novel business models. For example, heart patients using

implanted or wearable sensors now have a real-time guardian

angel monitoring them all day and night, reporting to doctors if

there is any cause for concern or if a medication needs to be

modified. Insurers in Europe are offering to install sensors in cars

to monitor behavior, so they can offer rates based on actual

performance rather than demographic guesstimates. And luxury

carmakers are putting in elaborate sensors that will automatically

take evasive action when the car senses danger if the driver is

asleep or distracted.

Stepping on the Gas

� A BMW is now actually a network of computers," declares

Ulrich Weinmann. That may seem like an exaggeration until you

step into a sleek Hydrogen 7 BMW sedan. Push the pedal to the

metal on the autobahn and the car responds as every BMW

should, cylinders growling enthusiastically as the ultimate driving

machine races past slower vehicles. But this car is not like any

other made by BMW. Press a button on the steering wheel and it

seamlessly switches from burning gasoline to consuming

hydrogen.

The key to this advance, says Weinmann, an innovation expert

at BMW, is smart software. Electronics have been in cars for

decades, but those were isolated �dumb systems," he adds. Now

cars are crammed full of networks of computers, with smart

software controlling and monitoring things. New BMWs were

among the first to synchronize seamlessly with Apple's iPhone

and download maps and directions from Coogle while you drive.

As the knowledge component of industries continues to grow,

it will lower even further the barriers to entry in many businesses.

Yet the same democratization of innovation that empowers the

new firms can be used to generate much greater and faster

innovation from within established companies. Some

multinationals are already doing this in Asia to keep up with their

local competitors.

The effer.ts of this h;we hemme inr.re::tsingly c:1e::tr in he;wy

engineering. Reinhold Achatz, of Siemens, claims the German

giant has undergone a hidden electronics revolution. �We have

more software developers than Oracle or SAP, but you don't see

this because it is embedded in our trains, machine tools, and

factory automation," he says. Achatz calculates that as much as

60 percent of his firm's sales now involve software. Some 90

percent of the development in machine tools is in electronics and

related hardware, and the figure is similar for cars.

The steady conversion of engineering into yet another

knowledge-based industry forces the pace of innovation for all

industries. "We are a quite mature industry, but customers now

expect change faster," adds Weinmann. The demand for change is

fastest in Asia. Several hundred new mobile phones are launched

every year in China, and customers there now expect their new

BMWs to be able to synchronize perfectly with each new

handset, he sighs.

New competitors are emerging from unexpected quarters,

which makes things difficult for established firms. One of them is

Elon Musk, who is challenging incumbents in not one but two

old-time industries. Musk made his fortune during the Internet

boom by selling PayPal, an online payments system, to eBay for

$1.5 billion. He now heads Space Exploration Technologies,

known as SpaceX. This is a start-up offering private space

launches. In 2010, it fired a rocket successfully into space, the

first to be designed, paid for, and launched entirely with private

money. Later that year, it managed to send the company's Dragon

reusable space capsule into orbit and back to the surface of the

earth safely, heralding a new chapter in private-sector-led

initiatives at NASA.

SpaceX is the vanguard. Many private-sector newcomers, fed

up with the overbearing ways of NASA and the big defense

contractors. are working furiously to commercialize space. The X

Prize Foundation and Google decided to fuel the fire by

announcing a $30 million prize for the first private sector team to

land and operate an unmanned rover on the moon. Peter

Diamandis, the foundation's chairman, believes the old guard is

no longer able to innovate. "Real breakthroughs require risk and

the ability to absorb failure, and large organizations are incapable

of such risk taking," he insists.

Musk is not waiting to win any prizes. Besides SpaceX, he has

also started Tesla Motors, which has devised an electric sports car

capable of accelerating from zero to 60 mph in four seconds and

has a top speed of over 130 mph. More impressively, thanks to its

advanced lithium-ion batteries and lightweight carbon-composite

construction, the Tesla Roadster has a range of perhaps 200 miles

on an overnight charge, less if driven fast and furious. The cars

cost a pricey $1 10,000 or so, and the global recession hit the start­

up firm's finances hard, but Musk managed to take Tesla public

in one of 2010's most successful IPOs.

Can established corporate giants hope to compete against such

disruptive innovators? The dinosaurs certainly are not giving up

without a fight. Visit Walmart's headquarters in Bentonville,

Arkansas, and you will be greeted by a large plaque in the lobby

that says: "Incrementalism is innovation's worst enemy! We

don't want continuous improvement; we want radical change,"

These are the words of Sam Walton, the firm's founder. And to

his credit, Walton did radically change the general store with his

innovative approach to low-cost, high-volume supermarket

retailing. But ask Linda Dillman, a senior official at the firm,

about innovation at Walmart today and she concedes that radical

thinking was easier when the firm was young. Size and scale offer

many advantages, but they also carry with them the seeds of the

firm's own destruction: lethargy and legacy. The bigger you are,

suggests corporate history, the harder you may fal1.

Ideas at Double Speed

That explains why many executives feel that the heat is on and

that they must innovate faster just to stand stil1. In part due to the

spread of information technology in traditional industries, product

cycles are undeniably getting shorter. Gil Cloyd, the former chief

technology officer at P&G, studied the life cycle of consumer

goods in America from 1992 to 2002 (way back before the

Internet's full impact was felt) and found that it had already fallen

by half. It has surely accelerated further with the arrival in full

force of the Web. That, he concluded, means his firm now needs

to innovate at least twice as fast.

The American company famous for inventing the Post-it

sticky note, 3M, also believes the world is moving much faster.

Andrew Ouderkirk, one of the firm's celebrated inventors, thinks

that is in part because many things that his company used to do

in-house are now done by outsiders. To keep up, 3M carries out

�concurrent development," which involves talking to customers

much earlier in the process to try to shorten development times.

Even the firm that laid down the first long-distance telegraph

lines thinks today's innovation frenzy is unprecedented. Achatz,

of Siemens, is adamant that innovation is happening much more

qUickly and that �access to information is so fast now that it

allows much faster product development cycles." His firm is

convinced that there will be an explosion of medical know-how

thanks to the advance of information technology into medicine.

Perhaps managers at firms everywhere should be both

farsighted and paranoid in equal measure as they scan the horizon

for unexpected competitive threats. Embracing the digital

revolution, as Siemens and other industrial giants are doing, is

one good way to prepare for a disruptive future. Another is to

push into difficult emerging markets in hopes of disrupting one's

own business model.

Role Reversal

That challenging technique is what Vijay Govindarajan, an

innovation expert at Dartmouth's Tuck School of Business, calls

reverse innovation. This, he explains, is the mechanism by which

the gap between rich and poor drives innovation. One pillar of

this theory, which echoes the arguments about disruptive

innovation put forward by Clay Christensen, exploits the

pp.rform�nc:p. g�p: Arms np.p.ci to lp.�rn how to c:omp. up with c:hp.::Ip

and cheerful products that achieve 50 percent of the performance

of their gold-plated offerings at 5 percent of the cost, just as

Indian and Chinese rivals do. Another pillar relies on filling the

infrastructure gap: because the developing world lacks the legacy

infrastructure of the rich world, that is where most of the new

roads, airports, and buildings are being built. Because this

infrastructure is built with the latest technologies and energy-

efficient designs, companies that compete successfully can

leapfrog ahead of rich-world rivals that stay focused on stagnant

domestic markets.

The sustainability gap in poor countries, where resource

problems such as water scarcity are often much more immediate

than in wealthy countries, also offers incentives for breakthrough

innovations that can be profitably brought back home. A

regulatory gap between rich and poor countries will also spur

reverse innovation, argues Govindarajan: pharmaceutical

companies will do more clinical trials in India, for example. and

stem cell or gene therapies will take off sooner in South Korea

and China.

The upshot is that by recruiting ingenious local engineers and

designers in places such as Bangalore and Beijing, and by paying

close attention to trends and practices in the market, forward­

looking Western firms in some industries are coming up with

products and services that can be sold in other parts of the world

too. For example, Nokia's engineers are finding that many

Chinese and Indians access the Internet mainly through their

mobile handsets. Such customers' requirements for their handsets

may therefore be quite different from those of Western users,

many of whom have computers at home and at work.

Unilever has long had a strong distribution network in India,

but it has expanded its efforts with a division called Shakti, which

provides Indian women's self-help groups with business

education and the chance to earn a living selling cheap sachets of

Unilever products. The effort has proved so successful that

Unilever introduced a high-tech element: the Shakti entrepreneurs

now run kiosks with personal computers that villagers can rent to

send e-mails and browse the Web for things that can make a big

difference to their lives, such as market prices for various

commodities. Google has taken Wenda, a question-and-answer

�knowledge community" product developed by its division in

China (before the firm's withdrawal from that market in 2009) to

help overcome a lack of local content, and launched it in the

Russian market.

A. G. Lafley, the former boss of P&G, says many Asian firms

began imitating what foreign ones did but are now �very

innovative, especially with business models." Lafley sees Indian

firms shaking up the way foreign companies operate, and not only

with back-office services where many began. Hours after he

uttered those words, Wipro, an Indian pioneer of software

services, said it would open a new development center in Atlanta

that will report back to its headquarters in Bangalore,

This is forcing P&G to innovate in other ways too. Lafley uses

the example of detergents in China, where the company is using a

low�cost manufacturing method that he likens to Coca-Cola's

syrup model, in which the company supplies a concentrate to

local bottlers. P&G provides secret, high-value performance

chemicals to Chinese partners, who add basic ingredients and

packaging before distributing the products.

The notion of dinosaurs learning to dance to a new tune is not

as ridiculous as it may first seem. When the personal computer

first arrived on the scene some three decades ago, the computing

world was dominated by big, bureaucratic firms peddling

mainframes and other centralized solutions. IBM, Digital, Wang,

and other giants of that era pooh-poohed the PC, considering it a

toy-and they dismissed the unknown Taiwanese manufacturers

building and assembling it too. "There is no reason for any

individual to have a computer in his home," declared Ken Olsen,

boss of Digital Equipment Corporation, back in 1977.

History shows how wrong they were, of course: not only did

the personal computer transform business, but its arrival proved

the calling card for the rise of flexible Asian manufacturing too.

Unable to adapt to a world of networked and distributed

computing, Digital and Wang went bust. However, IBM set up its

own PC division as a hedge on its bet-and managed to come up

with a personal computer offering, bundled in with lucrative

service contracts, that corporate clients loved.

And when this business model itself was at risk of being

disrupted by the software-as-a-service approach pioneered by

Salesforce.com, IBM moved itself to a service-based approach

and spun off its PC unit altogether. To whom did Big Blue sell its

unwanted Lenovo division? Chinese investors, of course. That

may seem ironic, but it was ever thus in the computer business, as

the history of Intel reveals.

Lessons from a Master

Not too long ago, Andy Grove taught a class at Stanford Business

School. As a living legend in Silicon Valley and a former boss of

Intel, the world' s leading maker of computer chips, Grove could

have simply used the opportunity to blow his own horn. Instead,

he started by displaying a headline from the Wall Street joarnal

heralding the takeover of General Motors by the Obama

administration as the start of "a new era." He gave a condensed

history of his own industry's spectacular rise, pointing out that

plp.nty of vp.np.r�hlp. firms-with n::lmp.s such ::IS Oigit::ll, W::Ing,

and IBM-were nearly or completely wiped out along the way.

Then, to put a sting in his tale, he displayed a fabricated

headline from that same newspaper, this one supposedly drawn

from a couple of decades ago: "Presidential Action Saves

Computer Industry." A fake article beneath it describes

government intervention to prop up the ailing mainframe

industry. It sounds ridiculous, of course. Computer firms come

and go all the time; such is the pace of innovation in the industry.

Yet for some reason this healthy attitude toward creative

destruction is not shared by other industries. This is just one of

the ways in which Grove believes that his business can teach

other industries a thing or two. He thinks fields such as energy

and health care could be transformed if they were run more like

the computer industry, made greater use of its products, and

dramatically accelerated the pace of innovation.

Though Grove's scientific credentials are solid, he will

probably be best remembered as a daring and successful

businessman. Richard Tedlow, a historian at Harvard Business

School, calls him "one of the master managers in the history of

American business." One reason is market success: under

Grove's tenure, Intel came to dominate the microprocessor

industry and its market capitalization rocketed up (making it, at

one point, the world's most valuable company). A bigger reason

lies in how exactly he managed to steer Intel to such spectacular

success-a tale that shows how the fine American traditions of

entrepreneurship, ambition, and sheer chutzpah can revive

innovation at companies and countries alike.

One particularly risky decision he took is revealing. In Only

the Paranoid Survive, Grove's bestselling book, he argues that

every company will face a confluence of internal and external

forces, often unanticipated, that will conspire to make an existing

business strategy unviable. In Intel's case, such a strategic

inflection point arose because its memory chip business came

under heavy assault from new Japanese rivals willing to undercut

any price Intel offered.

What could he do? The firm's roots and most of its profits lay

in making memory chips; Intel's microprocessor group was just a

small niche. The firm's two founders and much of its engineering

staff were too emotionally wedded to its past successes to make a

break. But Grove decided to bet the future of the company on

microprocessors, a move that saved his company and transformed

the industry. He argues now that it is not only companies that face

such an inflection point; so too do societies and countries. That

echoes a central premise of this book: the world is at a strategic

inflection pOint, and the policy and investment decisions this

generation makes in the next decade will cast a long shadow over

future generations.

At the time, the microchip business was producing such

unreliable products that customers insisted that companies such as

Intel always license new products to a secondary supplier in order

to ensure reliability of supply. Grove's efforts to tighten up

quality control led to a commercial coup. When his firm

introduced its widely anticipated 386 processor, he stunned the

industry by declaring that Intel would not license any secondary

manufacturers. This was a huge risk for computer makers, but

such was their appetite for the new chip that they bought it

anyway. Intel's ability to deliver good enough chips in large

numbers meant profits no longer had to be shared with secondary

manufacturers.

With his reputation for ruthlessness in the marketplace and

rigorous discipline inside his firm, Grove has much in common

with another American business leader: Lee Raymond, the

formidable former chairman of ExxonMobil. Both men were

feared not just by rivals but also by many of their employees.

Grove once even spearheaded a sales campaign against a superior

chip made by Motorola in an effort dubbed Operation Crush.

When asked about such bully-boy tactics, Grove remains

unrepentant. He even likes the comparison with the unloved

oilman: �I never knew Lee Raymond, but he did take Exxon to

the top of the Fortune SOD-and that's OK with me."

Personal admiration aside, however, Grove is convinced that

Exxon and its Big Oil brethren are in a sunset industry. He has

written and lectured widely on energy and environmental topics

in recent years, arguing that oil and cars are heading for a divorce.

He regards electricity as the most promising replacement fuel,

and thinks battery technology has the potential to produce an

Intel-like giant as the industry develops.

Another business he believes to be ripe for disruption is health

care. He complains that the industry seems to innovate much too

slowly. The lack of proper electronic medical records and smart

clinical decision systems bothers him, as does the slow-moving,

bureaucratic nature of clinical trials. He thinks pharmaceutical

firms should study the fast "knowledge turns" achieved by

chipmakers, so that the cycles of learning and innovation are

accelerated. A knowledge turn, a term coined by Grove, is the

time it takes for an experiment to proceed from hypothesis to

results and then to a new hypothesis-around eighteen months in

chip making, but ten to twenty years in medicine.

Given the coming perfect storm of global challenges

confronting the world economy, Grove is surely right in calling

for a dramatic acceleration in the pace of global innovation. But

can companies in slow�moving industries such as health care and

energy (two sectors that GE's boss, Jeff Immelt, also thinks are

the keys to his firm's and America's future) really respond to his

call? The surprising answer is yes, as the experiences of Kaiser

Permanente demonstrate.

How the Health Care Industry Can Save Itself

On a trip to America in early 2010, Nicolas Sarkozy, France's

president, could not resist the temptation to needle his hosts. Just

before the visit, his American counterpart. Barack Obama, had

secured congressional approval of a controversial but ambitious

plan (dubbed "Obamacare" by its critics) to expand the country's

health insurance market dramatically. Observing that America is

the only wealthy country to lack universal health coverage,

Sarkozy sniffed: "Welcome to the club of states who don't tum

their back on the sick and the poor."

Europeans have long thumbed their noses at the bloated U.S.

health care system. It is true that parts of it are convoluted, cruel,

and much too costly. But Richard Feachem. a health care expert

and the former boss of the Global Fund to Fight AIDS,

Tuberculosis and Malaria, argues that such a view ignores

"nuggets of good practice." The best such nugget, he reckons, is

Kaiser Permanente (Kaiser) , a not-for-profit health insurer and

hospital chain that in 2009 took in $2 billion more than the $40

billion it spent.

Though there are plenty of dedicated doctors and nurses, the

American health care system is dominated by cream-skimming

health insurers and the myriad fee-for-service providers they do

business with, which drive up costs by charging high prices for

piecework. Kaiser's business model integrates fixed-price health

insurance with treatment at its own hospitals and clinics. This has

led to big efficiency gains, making Kaiser one of the cheapest

health care providers in most of the regional markets in which it

competes. Thanks to Obama's reforms, more than thirty million

Americans will enter the health insurance market over the next

few years-and Kaiser's low prices should make it a big

beneficiary.

Moreover, Kaiser's medical results are as good as its financial

ones. By many objective clinical measurements, it is the best­

performing health care outfit in the regions it covers. The firm's

success obviously holds lessons for its American rivals, but given

that Kaiser serves some 8.6 million patients-more than the

population of Austria-and has come up with some world-beating

innovations, Feachem believes that there is much that Europe can

learn too.

At Kaiser's Oakland Medical Center in northern California,

Christina Ahlstrand, a lifelong customer, has come to see her

doctor, Jennifer Slovis. Ahlstrand had been experiencing �very

low energy," so she e-mailed to see if she should get any blood

tests done. After reviewing her electronic medical records (which

include all her lab tests, prescriptions, e-mail exchanges, and

notes from visits to all specialists), Slovis e-mailed her back

saying she needed to see her in person.

Many health systems, including Britain's National Health

Service (NHS) , have tried unsuccessfully to implement

comprehensive computer systems; patients and doctors often hate

them. But studies published in the journal Health Affairs and

elsewhere show that Kaiser's embrace of technology (its doctors

conducted nearly nine million electronic consultations in 2010)

has resulted in fewer frivolous visits, better medical outcomes,

and soaring patient satisfaction. Patients can even send doctors

photos of worrisome moles or slow-healing wounds by e-mail for

remote diagnosis. In other words, Kaiser has managed to craft a

learning system that meets Grove's call for faster knowledge

turns.

Ahlstrand, like many Kaiser patients, loves this system. She

also likes Kaiser's personal-health website, which gives her tips

and points her toward classes on healthy living. Slovis, for her

part, is pleased that her work is "nearly paperless" and that she

can easily track the specialists treating her patients, "so I know

exactly what's going on."

The ease with which Slovis tracks Ahlstrand's interactions

with specialists and any resultant test results is indicative of the

sort of integration that is missing in most health systems. George

Halvorson, Kaiser's boss, argues that such coordination is all the

more essential because of the dramatic rise of such lasting and

expensive afflictions as metabolic syndrome, diabetes, and heart

disease.

Kaiser also aligns incentives both to promote parsimony and

to improve the quality, rather than merely the quantity, of the care

it gives. Patients such as Ahlstrand use e-mail because it is free

and convenient, whereas a personal visit can involve hassle and

an out-of-pocket payment. Slovis and other Kaiser doctors are on

fixed salaries, unlike America's many self-employed physicians,

so they have every incentive to share information with other

specialists and no financial motive to order unnecessary

procedures.

Kaiser's third big advantage is that its integrated approach and

incentive structure encourage investment in forms of long-term

care such as the wellness classes that Ahlstrand enjoys. The firm

is in the midst of a ten-year, $30 billion capital investment plan. It

has now completed the rollout of its computer system-the

biggest one in the world for private health care.

Many other insurers and health systems avoid making such

investments because of �churn" : patients switch insurers

frequently, so any spending on preventive medicine, aimed in

particular at avoiding expensive hospital visits in the future, ends

up benefiting a rival company. Kaiser says its churn rate is well

below that of its rivals, so it can invest for the long haul. It even

funds an innovation center located in California that perfected the

telemedicine systems its doctors are now using for remote

dermatology consultations, for example.

Clay Christensen applauds the firm's culture of innovation. He

notes that Kaiser's dentists routinely apply a coating to children's

teeth that helps prevent cavities, a procedure that many other

American dentists tend not to use. Why not? In an integrated

system with incentives aligned properly, he argues, preventing

future cavities saves the company money. In contrast, in a fee-for­

service system, "future cavities represent future revenue."

If Kaiser's approach is so successful, why is it not more

widely copied? A number of health systems from around the

world, induding Britain's NHS, have sent emissaries to

California to study its approach, but efforts to replicate it have

met with only limited success. Within the United States, a handful

of outfits such as the Mayo Clinic independently evolved into

integrated systems, but the rest of the industry remains a

fragmented mess.

The prevailing culture of health care in the country is difficult

to overcome. Some American patients, used to haVing all the

scans and consultations with exotic specialists they want, costs be

damned, do not like Kaiser's frugal ways. By the same token,

some freewheeling American doctors do not like its rigid systems

or fixed (albeit generous) salaries. Much the same applies in other

countries: whether in politicized state-run systems or profiteering

private ones, the incentives for doctors and patients are seldom as

soundly aligned as they are at Kaiser. "Most of its success is

explained by culture," says Alain Enthoven, a health economist at

Stanford University, "and that is simply not easy to replicate."

If an American health care giant can learn to be so nimble,

surely there is hope for many other big businesses now

confronted with the threat of disruptive innovation. Reverse

innovation will help steal the thunder of potential rivals from

overseas, while investing in smart technologies and systems will

help accelerate knowledge turns at home. The key lies in

cultivating a culture that embraces change, experimentation,

failure, and rapid learning.

If companies do that, they have a good shot at surviving, and

perhaps even conquering entirely new markets. That is especially

true because capitalists now have a powerful new ally in their

quest for sustainable profits, as the next chapter explains:

dynamic social entrepreneurs who want to harness market forces

to save the world.

9

Greed for Good

A big problem for the future of capitalism and the earth is

that COlporate balance sheets and national accounts do not

generally take account of natlJrai capital, such as the value

of ecosystem services provided by the Earth, or of the many

intangible forms of human capital that matter in the Ideas

Economy. Only when capitalism stops flying blind can

mankind hope to start flying in the right direction. In fits

and starts, governments and companies are moving toward

cradle-la-cradle analysis of the tme costs of goods and

services.

Advocates of market-based solutions to grand global

problems suggest that business can shift from being part of

the problem to being at the heal1 the solution if capitalists

take a longer-telw and more honest view of the impact of

business on society. On this argument, as governments

embrace proper metIics and measurement of wellness and

sl1stainability indicators and adopt laws that force

companies to take account of such externalities as carbon

emissions, incentives will shift. Greed can be harnessed as

a force for good. But the key to this transformation is the

powerful role individuals can play as innovative

entrepreneurs.

Leading the charge toward hybrid business models of

the future is a new breed of capitalist. Social entrepreneurs

are motivated by the desire to bring about social change

and to tackle the world's wicked problems, but they are

hardly bleeding hearts. They see the profit motive and

maIiet discipline as important tools in designing socially

responsible enterprises that are sustainable in the long

term. And unlike some nongovernmental organizations of

the past, they are generally willing to wOlk with traditional

cOlporations to advance their social agenda.

In time, goes the algwnent, the greater reward will go

not to those who grab the quick and dirty buck but to those

who earn the sustainable and sound billion. Financial

experts see the beginnings of a new trillion-dollar asset

class, akin to the eaIlier rise of emelging markets and

hedge funds, in the growing band of "impact investors. "

Some even claim that these are the foundation stones for a

new kind of socially aware capitalism that could prove the

hallmaIi of the twenty-first-century global economy.

This does not mean that it will always be profitable for

all businesses to solve all social problems. Alas, the mles

of economics, just like the mles of gravity, still apply. Even

so, the lise of social entrepreneurs is a powerful trend.

Both big business and government need to pay attention,

for the dismptive ideas and business models bubbling up

from the bottom of the citizen sector have the potential to

change the world.

Back in 198 1 , Jack Welch gave a speech at New York's Pierre

Hotel that captured the zeitgeist of the age every bit as well as

�greed is good," Gordon Gekko's catchphrase from the movie

Wall Street. Welch shot to business superstardom when he took

over an ailing GE and started firing thousands of employees. His

approach to downsizing was so tough-minded that he came to be

known as �Neutron Jack"-after the neutron bomb, which is

thought to kill people but leave buildings intact.

In that seminal speech, entitled �Growing Fast in a Slow­

Growth Economy," made shortly after he took over the top job at

GE, he spelled out his philosophy of cutting fat, selling off

underperforming units, and aggressively driving up short-term

profits at a pace that outdid national or global economic growth.

He vowed that GE �will be the locomotive pulling the GNP, not

the caboose following it." That call to arms, followed by a

twenty-year tenure in which he relentlessly and successfully

pursued quarterly profits, made him the poster boy for a certain

brand of capitalism known as the shareholder value approach.

That approach has it strengths, to be sure. Managers have clear

accountability and cannot easily loot their companies or pad their

pockets. Shareholders are able to benefit directly from their

investments through quarterly returns. Unlike confused

conglomerates or murky family-run companies, public

corporations with managements that must regularly report to

shareholders on a quarterly basis are usually held to account. The

result should be proper stewardship of precious assets. Welch

certainly inspired many, and he was lionized as one of the heroes

of American capitalism when he retired in 2001.

Yet in the wake of the global financial crisis it seemed he was

offering something of a mea culpa for his advocacy of

shareholder capitalism. In an interview with the Financial Times

in 2009, he declared that the emphasis placed by companies on

quarterly profits and share price targets had gotten out of hand.

�On the face of it, shareholder value is the dumbest idea in the

world," he declared. "Shareholder value is a result, not a

strategy . . . your main constituencies are your employees, your

customers, and your products."

Those are remarkable words coming from Neutron Jack, but

perhaps the shift is understandable. After all, the excesses of the

age of Enron and Lehman Brothers have shaken capitalism to its

core. Roger Martin of the Rotman Business School at the

University of Toronto argues that just as Welch's first speech

marked the era of short-term capitalism, his second speech now

ushers in a new era. Martin believes the coming form of

capitalism will focus much more on community, and so will need

rules and regulation to protect that community. The watchword,

he thinks, will be trust-especially institutionalized trust.

How exactly are companies supposed to build such trust in an

age when many bosses seem rapaciously self-serving and out of

touch with the concerns of society or the need to tackle pressing

global challenges? And what should the roles of government and

the nonprofit sector be? These dilemmas are leading to much

soul�searching, and lots of big questions are being raised today.

One way forward is through a reinvention of business models to

embrace transparency, honest accounting, and patient capitalism.

The deceptively small example of the Acumen Fund, a for-profit

but socially conscious investment outfit in New York, shows that

this can be done.

The Patient Capitalist

For the most part, champions of market forces are a glum lot

these days. But not Jacqueline Novogratz. a market-minded

development expert. The current crisis in capitalism, she believes,

strengthens her call for a sweeping change in how the world

thinks about poverty, economic development, and global

challenges. "The financial system is broken, yes, but so too is the

aid system," she observes. In her view, "a moment of great

innovation" could be at hand.

In The Blue Sweater, her autobiography, she describes her past

frustrations working in such pillars of finance and development as

Chase Manhattan Bank, the African Development Bank, and the

Rockefeller Foundation. She found them bureaucratic, distant,

and condescending to those they sought to help. So in 2001 she

set up the Acumen Fund, a "social venture capital" outfit, to

promote what she calls patient capitalism.

Acumen is an odd mix of charity and traditional investment

fund. It takes donations from philanthropists in the usual fashion

but then invests them in a businesslike way. by lending to or

taking stakes in firms. The recipients-private ventures aiming

for profits-must serve the poor in a way that brings broader

social benefits. Acumen goes to great lengths to measure those

benefits, and thus the efficiency of its work.

Acumen's charges are a diverse bunch. In India. Drishtee runs

a network of Internet kiosks in rural areas, while LifeSpring runs

low�cost maternity hospitals. A to Z Textile Mills, a manufacturer

of antimalarial bed nets, has grown to become one of Tanzania's

largest employers. Some ventures, including a Pakistani mortgage

provider and an Indian pharmacy chain. have flopped. But many

others manage to repay their loans (granted at below�market

rates) or generate dividends. Acumen reinvests its profits in other

companies, thus stretching the initial donations further.

The notion of applying business methods to philanthropy is

attractive, but does it really work in practice? Acumen accepts

that the use of performance indicators can provide a false sense of

precision. After all, how can one prove beyond doubt that a water

filter prevented a child from falling sick? But it is possible to use

the results achieved by charities in the same field as a benchmark.

Thus Acumen insists that A to Z's bed nets must cost less than

the $10 that Malaria No More, a big traditional American charity,

says it spends delivering each one it gives away.

Novogratz thinks such measures help guard against the

inefficiency and corruption that often afflict traditional aid

efforts. On one of her first assignments abroad, she spent

countless days poring over the books of a struggling Kenyan

microfinance firm. When her findings pOinted to mismanagement

and cronyism, her detailed handwritten report mysteriously

vanished and she was sent packing. She explains that Acumen

uses measures, however imperfect, that "take the pulse of the

patient" so that necessary strategic changes can be made on the

fly rather than waiting for "a thorough autopsy" when a venture

fails.

Such pragmatism is typical of Novogratz. "We're not

fundamentalist about anything," she says. But it also points to

another critique of Acumen: its improvised approaches, sniff

theorists, cannot be scaled up and are therefore not up to the task

of tackling global poverty. At first blush there is something to this

argument. After all, the fund has barely $40 million in

investments, a trivial sum compared with the billions of dollars

spent by governments or big charities such as the Gates

Foundation.

Look more closely, though, and there is reason to think that

Acumen is punching above its weight. For one thing, its novel

approach is fostering a proper debate among development experts

about the role of market forces and accountability. Acumen has

its admirers at big development agencies. Novogratz was recently

even invited to address UNICEF, one of the biggest. Her firm

runs highly coveted fellowship and mentoring schemes, and its

alumni are spreading its ideas throughout the development field.

The firm's influence in poor countries is also bigger than it

first appears. By leveraging Acumen's funds to obtain other

financing, recipients are able to magnify their impact. Even more

important, perhaps, is the firm's catalytic role in sparking

entrepreneurship in developing countries. Acumen devotes much

time and money to training local managers, rotating experts from

the developed world through its recipient firms, and

disseminating successful ideas.

Novogratz hopes all this will help overcome cultural barriers

that have held back business in some societies. She recalls how

she advised a group of very poor women running a small,

unprofitable bakery in Rwanda some years ago. She had to

grapple with local social norms, such as the reluctance of its

saleswomen to speak to strangers, but she ultimately succeeded in

turning the business around.

When Novogratz returned to Rwanda years later. she

discovered that the bakery had been wiped out by the country's

civil strife. Some of the seemingly inhibited women who had

worked there had subsequently taken up machetes in the

country's genocide. Such unvarnished experiences of poverty

point to the best reason to think Novogratz may yet succeed:

unlike many in the development world. she does not romanticize

poverty or patronize the poor.

She puts a strong emphasis on listening to those she seeks to

help. Her advocacy of market-based approaches is inspired not by

ideology but by the firm conviction that markets are the best

�listening device" to ascertain the real needs and wants of poor

consumers. This lesson is borne out by other social entrepreneurs

serving the bottom of the pyramid. Traditional for-profit

businesses hoping to conquer global markets would do well to

pay attention.

That is because the Acumen story points to two powerful

forces with the potential to upend the global economy's

incumbents. The first trend is the dramatic transformation of the

nonprofit world from sleepy, underresourced, and inefficient to

market-minded, well-funded, and eager to change the world. The

second trend, driven in part by the first. is the emergence of

hybrid business models and coalitions that blend both for-profit

and nonprofit aims. If these two trends alone materialize, they

would do much to help the world tackle many of the difficult

social and global problems that governments and businesses have

failed to solve.

But some people go beyond this, building on these trends to

make two further eye-catching claims. Some visionaries now

argue that mankind has evolved to a point where the pursuit of

purpose matters more to people than the pursuit of profit. On this

view, mankind is progressing toward a genuinely empathetic era.

Other pundits look at these two trends and conclude that

capitalism itself is evolving into a higher form. Companies that

want to flourish in the future must, on this argument, look beyond

such familiar concerns as making profits and must instead strive

to create shared value that will benefit all of society by finding

solutions to difficult social problems.

Leave aside for the moment those extraordinary claims, which

will be examined carefully later in this chapter. After all, just the

first two trends by themselves are a big deal. The rise of a

dynamic "citizen sector" -as Bill Drayton of Ashoka calls

nongovernmental organizations-promises to drive much growth

and innovation in the global economy in coming years, and to

disrupt plenty of established business models along the way.

Drayton believes it is also ushering in "a sea change in the way

society's problems are solved." His forecasts are not to be

dismissed lightly. Drayton is perhaps the most respected figure in

this fledgling field, and Ashoka the oldest and most successful

cultivator of social entrepreneurs worldwide. Bill Clinton, writing

in his book Giving, described the soft-spoken Drayton this way:

"He is not well known . . . but to those who believe in the power

of private citizens to improve society, Bill Drayton is a hero."

Sipping tea at a quiet corner table in the Harvard Club of New

York, dressed in a conservative suit and tie, the bespectacled

Drayton hardly seems like a troublemaker. Yet his eyes light up

and his voice grows passionate as he lays out his sweeping

arguments for the rise of the citizen sector. Through almost all of

mankind's time on earth, he observes, a very tiny elite controlled

almost all wealth and power. Systems, be they government or

church, were top-down. Ordinary people lived in grinding

poverty, deprived of basic necessities, or at best did mindlessly

repetitive and arduous jobs. Around 1700, though, something

happened. Thanks to the industrial revolution, new institutions

such as the limited liability corporation, and the strengthening

rule of law, competitive and entrepreneurial businesses grew. The

rise of a dynamic business sector led to extraordinary

improvements in quality of life, he pOints out, yet the

nongovernmental sector stagnated throughout that period.

Only about thirty years ago, he argues, did the charitable and

social sector begin to grow more productive. There were, of

course, individual social entrepreneurs such as Florence

Nightingale who long ago made a difference-Drayton is himself

a veteran of the American civil rights movement-but he believes

they did not have a systemic impact on the productivity of the

noncorporate, nongovernmental sector. As governments began to

step back around the world-be that because of ideology in

Thatcher's Britain and Reagan's United States or because of the

collapse of dictatorships and military regimes in the Soviet Union

and Latin America-ordinary people filled the void. In India, he

believes, the coming of age of the first postcolonial generation

was the driving force, as dynamic young people decided that

crony capitalists and incompetent officials of the Licence Raj

were not doing enough to tackle the country's social ills. Given

the dissatisfaction with bureaucracies seen around the world, as

well as the fiscal woes of governments in many places, it seems

unlikely that this trend will reverse anytime soon. The number of

citizen sector groups, and the number of jobs created by those

groups, has indeed shot up around the world at a faster pace than

other sectors. The scope and scale of those social enterprises are

also growing impressively.

Drayton vehemently insists that the productivity of this sector

is also growing dramatically, accomplishing in a few decades

what it took for-profit enterprises several centuries to accomplish.

Lots of anecdotal evidence supports this thesis, but one expects a

former McKinsey consultant such as he to have hard data and

PowerPoint slides at the ready. Alas, it turns out there is

insufficient quantitative evidence to back up this claim-in part,

as discussed below, because this sector has yet to agree on the

proper metrics for measuring social impact. Brushing aside that

objection, he argues such leapfrogging is happening because the

social sector can learn by analogy, copying what works in the

corporate sector, thereby avoiding having to reinvent the wheel

(for example, by simply buying computerized accounting systems

off the shelf rather than starting with an abacus). He observes that

many more people are educated today than back in 1700, which

helps his efforts. It also helps that the sector is now attracting

world-class talent-especially from the younger generations­

which was not always the case for nonprofits in the past.

Another big reason to believe that the productivity of this

sector is improving is the useful role that market-minded donors

-dubbed "philanthrocapitalists" by Matthew Bishop (the

Economist's U.S. business editor) and Michael Green in an

influential recent book-are playing. As they put it. such folk

"see the world full of big problems that they, and only they, can

and must put right." In short, a generation of billionaires who

made their money the old-fashioned way are now trying to save

the world in a newfangled way. By pushing the social sector to

harness the profit motive to achieve social goals, the new

generation of wealth wants to motivate greed for good.

Pierre Omidyar and Jeff Skoll, the men behind eBay, are

among the most aggressive and influential of this breed. Omidyar

was a key backer of Ashoka, and Skoll has set up a well-endowed

center at Oxford University's Said Business School to study and

promote social entrepreneurship. Some, such as Acumen, are

making sure those that get their money have viable businesses in

addition to social goals. Others, such as the Gates Foundation, are

pushing recipients to be much more rigorous about analyzing

impacts than nongovernmental organizations used to be in the

past. Some are forging entirely new business models. When

Google set up its charitable arm, Google.org, it decided not to set

it up as a not-for-profit entity under American law. The firm saw

that there were areas of social need where its internal innovation

efforts may well be boosted if its breakthroughs (smart electricity

meters and self-drive cars are two examples the firm has come up

with) are allowed to get to market and make a profit.

Odd Bedfellows

Ashoka's founder, Drayton, believes the upshot of all this is that

the social side of the world economy is becoming as

entrepreneurial as the business side. As it does, big business can

no longer ignore the social sector, dismissing it as small and

unproductive. On the contrary. a growing number of forward­

looking businesspeople are now joining hands with social

entrepreneurs to create hybrid business models that aim to serve

the long-neglected bottom of the pyramid-say, in ways that for­

profit companies typically have not in the past (though some

nimble dinosaurs now are trying).

A big obstacle to reaching such customers is that they are

often in remote areas or slums not easily reached by traditional

sales forces. Citizen sector organizations can act as demand

aggregators, marketers, and even validators for a company

seeking to persuade a reluctant community to embrace its

offerings. For example, P&G is working with social entrepreneurs

in a hybrid venture that is rolling out E-Health Points in Punjab,

India. This start-up is establishing for-profit centers in

underserved rural areas to provide health services as well as clean

water. Its health workers roam the local area with backpacks

carrying diagnostic equipment; a mobile phone captures and

interprets the data, which can then be used for paid telemedicine

consultations.

If you doubt that hybrid business models will succeed in very

poor areas, consider this question: will seamstresses in Guatemala

or poor farmers in India pay $3 for a pair of reading glasses? It

seems unlikely. Such people are among the three billion or so

who earn only a dollar or two a day, so $3 is a fortune to them.

And yet VisionS pring, an American optical firm, is betting that

they will pay that princely sum for its spectacles.

The notion that only subsidies or handouts can provide the

world's poorest with essential services such as health care is

wrong, says Jordan Kassalow, the firm's cofounder and a public

health expert. Years of treating river blindness and other

developing-world diseases as part of charity campaigns

convinced him that such programs often falter when the money or

political will dries up. He believes the bottom of the pyramid

would be better served by campaigns that involve some payment,

so that costs are covered and the schemes are financially self­

sustaining.

Those public health campaigns also alerted him to the damage

done by a common yet largely overlooked complaint known as

presbyopia (which causes blurry close-up vision) . "For every

person that I treated for a serious eye condition," he says, "there

were fifty that needed simple, nonprescription reading glasses." A

pair of reading glasses, readily available in rich countries at

pharmacies and corner shops, can solve the problem. But the rural

poor have no such option.

"This is a failure of both government and the marketplace,"

says Kassalow. Government health clinics are understandably

preoccupied with life-threatening maladies, and urban optical

shops in poor countries typically shun simple reading glasses in

favor of costly, high-margin prescription glasses. But this neglect

takes a dramatic toll even on illiterates: farmers can no longer

identify pests and choose the proper pesticides, craftsmen cannot

manage fine handiwork, seamstresses cannot sew. As their Sight

fades, so does their income.

Precisely because that extra income means so much to the

poorest, Kassalow thought, they might be willing to pay for a

product that restores their vision and earning potential. His firm,

which already makes fashionable and expensive reading glasses

for the developed world (they are sold at fancy optical shops on

Manhattan's Upper East Side, for example), has set up a

philanthropic arm to sell glasses to people in the developing

world. Using VisionSpring's existing design, marketing, and

manufacturing facilities, it is now operating in India, Bangladesh,

Mexico, and Guatemala.

The key to the business is a concept Kassalow calls

microfranchising. �We deliver a 'business-in-a-box' to local

entrepreneurs, train them, and enable them to make money

helping people see better," he says. Each pair of glasses that

VisionS pring proVides to these entrepreneurs costs the firm about

$1 to make and deliver. The franchisee pays it $2 or so and sells

for about $3. Because every step of the value chain is profitable,

the business model is sustainable. Profits are reinvested to expand

the program. The company is on track to sell more than a million

pairs by 2012 and five million by 2016.

To do so, it has forged partnerships with outfits that have

strong retail distribution in rural South Asia (where it is making

its first big push). Drishtee, an Indian firm with Internet kiosks in

many villages, is now selling reading glasses, as is BRAC, a

community-lending organization in Bangladesh. The firm has big

plans for African expansion too. Perhaps the most intriguing of

VisionSpring's partners are marketing giants with ubiquitous

reach, including Unilever and lTC, an Indian tobacco

conglomerate. "People clearly have enough money to buy

cigarettes and chewing gum," says Kassalow, �so why not get

them to spend that instead on health?"

As the real-world examples of the Acumen Fund and

VisionSpring show, greed (read: market forces and capitalism)

can be a force for good. In fact, harnessing greed wisely is a

necessary precondition for kick-starting the innovation revolution

needed to tackle today's grand global challenges. But does this

really mean that profits matter less than purpose or that capitalism

itself is about to enter a kinder, gentler era? Don't bet your

pension on it.

The Invisible Hand Meets the Velvet Glove

The rise of social entrepreneurs, philanthrocapitalists, and hybrid

business models is surely to be applauded, but there are several

possible snags that could yet keep this movement from becoming

the transcendent force its boosters think it to be. One is the

potential for muddled incentives that arises from lumping

together profit ;mci pmpose hreHthlessly into one hllsiness mociel,

without first developing meaningful measures and metrics for

social impact. Another is the underdeveloped state of institutions,

regulations, and other norms in the hybrid sector, which makes it

ripe for exploitation and unintended consequences-growing

pains that have already fueled a backlash in the field of

microfinance. The biggest potential barrier, however, may be that

of unrealistic expectations. Just consider the burden now being

placed on the backs of those trying to improve the world: this

movement, claim some management gurus and company bosses,

adds up to a new and higher form of capitalism.

First, to purpose. There is no question that traditional business

models that assumed everyone was motivated strictly by

economic incentive are incomplete. As Dan Pink has argued in

Drive, profit is a good motivation for some things but not for

others. When people feel they do not have enough money for

decent housing, food, and education, they obsess over it.

However, behavioral studies suggest that unless people are

working on rote mechanical tasks, simply paying more money

will not yield more productivity. Since much of the world now

lives in the Ideas Economy, employers clearly need to consider

other ways of motivating talented workers. Pink puts the answer

pithily: autonomy, mastery, and purpose. As most readers would

readily agree, knowledge workers crave independence from

bosses and relish being very good at their chosen jobs.

The more surprising finding for ardent believers in capitalism

is that purpose can motivate people as powerfully as profit. You

can see this in the willingness of many people with day jobs to

spend their precious leisure time working on projects for free.

Just consider the many millions of hours of work that people

around the world have given away for free to build Wikipedia.

Linux, and other open-source, collaborative ventures. Clearly

having a social purpose can motivate people, and business models

built on that insight can attract much-needed talent and capital to

the citizen sector. "We are purpose maximizers, not just profit

maximizers," says Pink, "and that can make our world just a little

bit better."

Ah, but via that warm and fuzzy aspiration enters the muddle.

In profit-maximizing capitalism, the goal for companies is crystal

clear: maximize profits. This is not just a matter of greed. Peter

Drucker argued that the greatest good a company can do for

society is to excel at making the good or service it produces. It is

true that even in strictly for-profit firms, incentives can get

misaligned (over short-term profit versus long-term goals, say, or

over conflicts between the interests of bosses versus those of

employees) . Still, profit is a pretty clear metric for measuring a

firm's success at its core mission. Drucker in his later years came

to be a great champion of the citizen sector, but he remained clear

about the importance of businesses focusing on profit: "Profit is

not the explanation, cause, or rationale of business behavior and

business decisions, but rather the test of their validity. If

archangels instead of businessmen sat in directors' chairs, they

would still have to be concerned with profitability, despite their

total lack of personal interest in making profits . . . a company can

make a social contribution only if it is highly profitable."

50 one difficulty arising from hybrid business models is the

question of how to tell if a social business is being well run. How

can investors tell if a firm making a bit of proHt and delivering

some social value (say, selling antimalarial bed nets) is actually a

wonderfully run and efficient hybrid business or a mismanaged

and underperforming firm that will soon hit the rocks? Richard

Lyons, dean of the Haas School of Business at the University of

California at Berkeley, acknowledges that this is a significant

problem that the social enterprise movement-which he strongly

supports-faces today: �We really need metrics."

The good news is that there are some people now trying to get

the philanthrocapitalist world to agree on the importance of

metrics, and to move toward common standards for measuring

social impact (probably the best analog for profit in the nonprofit

world). Brian Trelstad, the chief investment officer of Acumen, is

one such courageous soul. He has scrutinized the various efforts

that now exist to quantify the social impact of hybrid enterprises

and concludes that these "tell a story" but �do not capture and

generate data that can allow for an independent assessment of

social innovation opportunities or their social impact." He

laments that the field has yet to develop independent

measurement tools, standardized criteria, or even common

definitions of terms. Even seemingly quantitative methodologies

such as sustainable return on investment (5ROI), "blended

value," and double/triple bottom-line accounting, he insists, �still

fall short of providing reliable, rigorous, and objective

quantification of social and environmental value."

His team at Acumen is developing a set of metrics, methods,

and measures that it hopes will win wider acceptance. However,

he is not holding his breath. Despite the blindingly obvious need

to develop some sensible, common measures of performance, he

finds that social businesses are generally not interested. More

shocking, he has found that donors-whom one might think

would welcome metrics that help them gauge if their money is

being well spent-are generally uninterested in metrics too.

Part of the explanation for this apathy is understandable: the

state of impact measurement is so poor today that embracing it

would probably lead to false precision. Just measuring the output

per dollar spent by a charity helping homeless people in Toronto

get jobs as bike messengers. for example. may measure efficiency

-but the better test of effectiveness would be a broader measure

of impact (say, how many people got off welfare and took on

taxpaying jobs as a result of the program) . Asked if it is now

regular practice among philanthrocapitalists to fund randomized

control trials, which are the gold standard among economists for

proving that a given approach works, to see if such schemes are

actually having the impact claimed, he pauses and sighs. With a

heavy heart, he reports that donors often do not want to spend the

money required to acquire such evidence: "They're mostly

interested in stories, not data."

There is now a fiery debate going on in the citizen sector

about the role of metrics and measurement. This should be of

great interest to those who want the citizen sector and hybrid

business models to succeed. The right response to imperfect

metrics is surely to invest in standardizing and improving them,

not to abandon them altogether. As for the argument that precious

donor money should go straight to charitable work, not on

running expensive trials to measure impact, that sounds like the

kinder, more charitable thing to do-but it is not. One

philanthrocapitalist cites a real-world example of donors funding

a new social business aiming at both profit and purpose, to the

tune of $150,000 a year. Running proper trials to measure real-

world impact would cost $100,000 in that case. The donors

refused, insisting that the money should go instead straight to

helping people through programmatic work, not measurement and

metrics. Again, that sounds compassionate, even reasonable. But

here is why that is a dangerously unhelpful stance to take. If that

new social business was actually harming the people it sought to

help, or even if it was just ineptly crowding out other social

entrepreneurs or government agencies that could have done

better, it does not deserve years and years of funding.

In short. the investment of $ 1 00.000 today would have

prevented those donors from misdirecting millions in future years

to that incompetent if well-intentioned social business. Richard

Lyons agrees with this logic and thinks donors must invest in

proper metrics and measurement if this sector is to grow-and

deserves to grow. He cautions that measurement in this messy

world of hybrid business models will �almost surely never be as

tidy and clear as with for-profit ventures." Even so, he proposes

what he calls the �running downhill" test. Many nonprofits live

hand to mouth, begging for money and �running uphill" till they

fail. And some nonprofits-Transparency International, say,

which tracks levels of corruption in various countries-should

never pursue profit. But many other sorts of charitable endeavors

will be suited to the new hybrid model. Holding such businesses

to the standard of making "nonzero financial returns" means they

will be financially viable and not living off subsidies forever.

With proper impact measurements in place, he reckons the test of

ensuring that these ventures are running downhill will move the

citizen sector a bit closer to the crisp performance metric that

Peter Drucker wanted.

Microfinance, Megacontroversy

Is it immoral to profit from the poor? In Philanthrocapitalism,

Bishop and Green include an anecdote that sheds light on this

controversy. On this account, a heated debate broke out on this

topic some years ago at the home of John Doerr, one of Silicon

Valley's most successful venture capitalists. He had been

captivated by the success of Grameen Bank, a path breaking

Bangladeshi charity that has managed to make millions of tiny

loans to very poor people-a concept known as micro finance.

Among the invitees were Muhammad Yunus, who went on to win

the Nobel Peace Prize for pioneering this innovation. and leading

businessmen and philanthropists from the region. Doerr hoped all

present would contribute money, and many did.

One who refused was Pierre Omidyar. After listening to all of

the arguments, he was convinced that the not-for-profit model

was the wrong way to go with micro finance. The need for

microloans is so great, he reasoned, that donor money alone will

never meet the need: a mixture of for-profit and nonprofit models

was necessary to achieve scale rapidly. Yunus later recalled that

dinner in an article in the New YOlkel: "He says people should

make money. I say let them make money-but why do you want

to make money off the poor people? . . . when they have enough

flesh and blood in their bodies, go and suck them, no problem.

Until then, no."

That row anticipated another of the problems that could yet

trip up the citizen-power revolution now getting under way: go

beyond the stirring rhetoric, and it turns out that purpose and

profit do not always mix well. In particular, people from the

nonprofit and development world are often suspicious of the true

motives of those who advocate using for-profit approaches to

helping the poor. This issue came to a head in the micro finance

world as for-profit microfinance institutions (MFls) began to go

public, earning huge payouts for their managers and investors.

Compartamos, a Mexican MFI, was the first Latin American for­

profit to go public back in 2007. SKS Microfinance, an Indian

firm, went public in 2010 for $358 million in the largest such

listing in that country's history. Deals such as these have poured

salt into the wounds, as evidence has surfaced of how extremely

poor people have endured high rates of interest at the hands of

these firms. In some cases in India, farmers have even committed

suicide rather than face the shame of not being able to repay their

loans.

All this has provoked understandable revulsion and sparked a

political backlash against for-profit microlenders. Yunus himself

fueled the flames of this. Under attack for entirely unrelated

reasons by politicians in Bangladesh (who ultimately succeeded

in removing him from the top of Grameen Bank in 2011), he tried

to direct attention back to those profiteering scoundrels. In an

opinion piece run by the New York Times not long before his

ouster, he declared that "commercialization has been a terrible

wrong turn for microfinance." Branding his for-profit competitors

as loan sharks, he insisted that the sector be reined in with heavy

regulations. Lenders must take deposits, he said, as did Grameen.

Regulators should also impose a rate cap of 15 percent above

costs on all lenders, he insisted.

Reasonable and philanthropically minded people differ on

whether micro finance-the poster child for the rise of the citizen

sector-should have only nonprofit business models or a mix of

for-profit and nonprofit. Yunus's position is certainly clear and

uncompromising. Many leading figures from the world of

philanthropy have voiced support for his position. Given his

credentials, even those who may favor market forces may be

tempted to agree with him. One influential voice who does not is

Vinod Khosla, the venture capitalist. He invested several million

dollars in SKS early on and stoutly defends its business model

today. He is convinced it has done far more good than harm,

despite the chorus of denunciations: "Millions of people now

have access to financial services . . . that's more social than any

nonprofit thing I could have done. And guess what? In the

process, I made $ 1 00 million."

Matthew Bishop, who served as an advisor to the United

Nations on micro finance before writing Philanthrocapitalism,

stoutly defends Yunus against the politicized attacks on his

reputation but still strongly disagrees with his position. In line

with Khosla and Omidyar. Bishop argues that for microfinance to

scale and help all those who desperately need help, private capital

is a must. He observes that the not-for-profit version of MFls

have had thirty years since Grameen arrived on the scene to work

out the kinks and scale properly. Yet barely 15 percent of people

earning less than $1 a day have access to microcredit. The

number of unserved soars dramatically if one raises the bar to

include those making less than $2 or $3 a day-wretchedly poor

people who are also surely deserving of loans. He also points out

the unfairness of calling private sector MFls loan sharks.

It is true that Compartamos charged very high rates-above

100 percent a year, a study concluded after the fact-when it

could have charged lower rates and still made a profit. But it did

so explicitly, in part, to attract more investors into a then-lonely

and highly risky market-and succeeded in doing precisely that.

Besides, loan sharks (the only real alternative many indigent

people have) can charge far more than that in real life-and break

people's legs if they do not pay. Not only did Compartamos not

do any such thing, but its loans were clearly a better alternative

for ordinary people-who managed a repayment rate upward of

98 percent, suggesting that this was not an impossible hardship.

What is the way forward for MFls? The pendulum may be

swinging toward the Yunus position, with several countries

starting to impose arbitrary rate caps on lenders. That is probably

a mistake: plenty of economic theory and history suggests that

rate caps are likely to produce shortfalls in supply. In this case,

the poor may have to endure a flight of private capital from

microfinance because returns will be suppressed.

The real lesson here is not that profit making per se is wrong,

but that unfettered markets are. The excesses seen at private MFIs

should have been checked by proper regulation. Stiff antitrust

laws and regulatory scrutiny by competent regulators will go far

in modernizing and humanizing this sector without killing the

goose that lays the golden egg. So too would demands for greater

up-front transparency-especially on the true cost of loans,

including any hidden fees-and the development of credit

bureaus and other institutions that come with the broadening and

deepening of new markets. As for Yunus's notion that all lenders

must also be deposit banks, it turns out that this is not permitted

in many countries. Regulations can be modified so that

microlenders must also take in deposits, but again, forcing them

to do this may well limit the number of investors interested in

getting into micro finance.

The profit motive has been blamed for this crisis of faith in

microfinance, but a failure of government is at least as much to

blame. Regulators must be alert and keep both hands on the

wheel, not fall asleep on the job, as has happened thus far. That

insight explains why the citizen revolution has some way to go to

achieve its aims. The mutual mistrust that business and

nongovernmental organizations have long had has softened but is

not completely gone, so the leaders of any alliances or hybrid

value chains must always be on guard to nip such crises in the

bud.

With luck, today's rows could prove merely the teething pains

of a novel experiment in improving the lives of the world's

poorest-an experiment that yields many lessons on how to build

markets at the bottom of the pyramid. If that happens, could the

world really enter a new, more empathic, and enlightened phase

of capitalism?

Beyond CSR

Few management experts are as influential as Michael Porter. The

brilliant Harvard Business School professor has shaped the

thinking of a generation of leading corporate managers with his

books on strategy, value chains, clusters, and competitive

advantage. He is as courageous as he is forward-looking. A few

years ago he even ventured into hostile terrain with his book

Redefining Health Care, coauthored with Elizabeth Olmsted

Teisberg, which stirred a hornet's nest by arguing that the

fundamental incentive structure in the bloated U.S. health

industry is distorted. What the industry needs to do is shift from

its current model of fee-for-service, or piecework, he rightly

argued, to �value-based competition" that rewards better patient

outcomes.

The great hero of capitalist managers now has another really

big idea: he believes it is time for a radical rethink of capitalism

itself. In a much-discussed cover story published by the Harvard

R/Jsine.,s Rp.vip.win e:nly 201 1 , m:mthoreci with M:nk Kr<lmer, he

put forward a provocative thesis he calls "creating shared value,"

which represents �the next evolution of capitalism." He believes

that the traditional business approach to social issues-spending

money on corporate social responsibility (CSR)-is wrongheaded

because it puts these vital issues into a ghetto apart from the core

strategy of the business. Porter even praises the late Milton

Friedman in passing, pointing approvingly to the conservative

economist's opposition to CSR. Porter observes that so many

companies are using such tactics as public relations exercises that

there has been a backlash: "The more business has begun to

embrace social responsibility, the more it has been blamed for

society's failures."

Instead, he argues, companies must put society's great needs

front and center when developing their strategies. Doing so will

require managers to look beyond the quarterly returns and other

short-term metrics, he insists, as these lead managers to ignore

important customer needs. He also pooh-poohs the "presumed

trade-offs between economic efficiency and social progress." In

downplaying trade-offs, a notion held sacred by economists, he

claims that there is "growing consensus that major improvements

in environmental performance can often be achieved with better

technology at nominal incremental cost and can even yield net

cost savings." By vigorously pursuing strategies that create

shared value, not just profit per se, he insists, the business world

will "drive the next wave of innovation and productivity growth

in the global economy."

In the brave new world of shared-value capitalism, the grand

challenges facing the world today will best be solved by self­

interested and profit-minded corporations: "Businesses acting as

businesses, not as charitable donors, are the most powerful force

for addressing the pressing issues we face." That may sound a bit

like the famous notion put forward by Friedman that "the

business of business is business," but in fact it is exactly the

opposite. Friedman believed that it was reckless and inappropriate

for the managers of a company, who have a fiduciary

responsibility to maximize returns on behalf of a firm's owners

(who are, of course, its shareholders), to spend company money

on favored social causes or pet charities. Managers should instead

return money to the owners, who are then free to give as

generously to philanthropic causes as they want. Porter says

capitalism can and must do better than this.

He also has little time for the conventional explanation of why

market forces do not always solve problems such as

environmental pollution, which involve externalities (say, the

health impacts on people living downwind of a coal-fired power

plant) that are not priced into the product in question (say, coal­

fired electricity). Environmental economists have long argued

that if governments want markets to deal with such externalities,

they should introduce government policies (such as carbon taxes

or cap-and-trade regulations, in the case of global warming) that

internalize them by way of the price mechanism. Surprisingly,

Porter is critical of externalities policies.

The idea of creating shared value is a breathtaking vision-but

does it really add up? This question matters, because it points to

the third big concern that could yet trip up the revolution

launched by Drayton and the army of social entrepreneurs: the

weight of unrealistic expectations. To be fair, Porter gets some

big things right. For example, he is surely right that managers

must take a long-term view of shareholder returns. If they do so,

they will often find that it makes business sense to invest a bit

more now on social �extras" -for example, in investing a bit now

to improve energy efficiency or making sure the suppliers of its

suppliers treat workers fairly-than a fly-by-night capitalist

might.

Beyond the call for managers to think long-term, does this Big

Idea really add up to a big idea? Opinion is divided. Many experts

agree that there is a crisis of confidence in capitalism, and Porter

is certainly right to look for creative ways corporations can win

back the public's trust. A number of leading chief executives

have warmed up to his theme. Nestle's chairman, Peter Brabeck­

Letmathe, and Pepsi's boss, Indra Nooyi, are two leading

corporate voices that have embraced the shared-value vision. But

not everyone is persuaded by this thesis.

Vijay Govindarajan of Dartmouth's Tuck School of Business

says �shared value" is a nice phrase but asks, "What's new

here? . . . Isn't this what business does at its best anyway?" He

bristles at the notion that capitalism has to evolve to a higher

plane to tackle society's problems. He points to the example of

Henry Ford, whose radical and hugely profitable business model

(aside from implementing the production line, he also paid above­

market wages so his workers could afford his cars) created

enormous shared value for his employees, for their communities,

and for the country in general. Robert Stavins of Harvard's

Kennedy School of Government, a leading environmental

economist, disagrees about externalities-based policies. Several

decades of successful experiments with such policies, starting

with "eco-taxation" reforms in northern Europe and extending to

many environmental regulations in the United States, show that

they do work very well.

The Economist's "Schumpeter" column was deeply

unimpressed: "It is not clear that Mr. Porter has come up with any

tangible improvement on the current way of doing business. Is it

true that shared value will ' drive the next wave of innovation and

productivity growth in the global economy,' or merely a pious

hope? For all we know the next such wave may come from

energy-hungry, sOcially divisive businesses, given the paucity of

evidence Mr. Porter offers to support his thesis."

That is probably too harsh a judgment. Even if he gets some

things wrong-such as his dim view of externalities policies-he

certainly gets the big picture right. The great opportunity lies in

going from "greed is good" to "greed for good." Incentives

matter, purpose matters, and enlightened corporations that take a

long-term view will find taking on some of the world's difficult

global problems to be profitable. This is not to say that all firms

will find all societal problems to be profitable always. And it does

not mean that the role for government or the individual is

diminished. Porter himself says, quite rightly, that companies

can't solve all of society's problems. And he gets the most

important thing right, according to GE's chairman Jeff Immelt: "I

agree with Michael Porter that the era of free capitalism without

consequences is over."

That sentiment sums up the challenge and the opportunity

facing business leaders, government officials, and aspiring

innovators today. The rise of the citizen sector is very real.

Aspiring innovators will need to overcome various obstacles that

are difficult but not impossible to surmount-not least the burden

of unrealistic expectations. But as social entrepreneurs and agile

corporations experiment with new business models that take

account of society's greatest needs, creative capitalism seems

likely to make a big impact in coming years. And the difference

between success and failure will often be determined by how

powerfully motivated entrepreneurs are to bring about change.

If at First You Don't Fail, Try, Try Again

Jessica Jackley has already helped to make the world a better

phtr.e. She mfOimcieci Kiv<t. <t p<tth-hre<tking Tnternet outfit th<tt

lets people anywhere lend small amounts of money at affordable

rates to aspiring entrepreneurs in the developing world. Kiva's

partners are established micro finance outfits around the world

(though hearing Mohammad Yunus inspired her to drop

everything and pursue micro finance, Jackley thinks he is wrong

about for-profit MFIs; she insists that both business models

should be allowed to compete in the sector). Those local MFls

post profiles of poor local people with a business need-say, a

new goat or a sewing machine-that requires some money.

Ordinary people in distant parts of the developed world, sitting

comfortably at their laptop computers, have been granting

microloans in such small amounts as $25 to the entrepreneurs

they wish to support. The firm has already channeled $200

million or so to the poor this way and has a repayment rate above

98 percent to boot. But the key to Kiva's success, she insists, is

not impressive scale or even the stellar repayment rate but the

personal connections that lead to empathy.

Not content with the success of one transformative firm,

Jackley-who is still in her thirties-is busy building another.

With a former classmate from Stanford Business School, she has

launched ProFounder, a Web platform to help entrepreneurs in

the United States "crowdfund" more efficiently. Most start-ups

get most of their early money not from venture capitalists and

certainly not from banks, which are too risk averse to back

upstarts; instead, they get it from a circle of intimates known

affectionately as "friends, family, and fools." Jackley knew from

personal experience that this is an extremely stressful process

made more so by the informal and awkward nature of these early

contributions. (Did Uncle Frank really promise you $5,000 for

your start-up at Thanksgiving, or was that the wine talking?)

There are complex regulations governing such investments that

vary from state to state, making life more difficult. Her for-profit

outfit has done all the donkey work, so aspiring entrepreneurs

need only tap their networks for money via her platform; the

firm's automated systems deal with most of the paperwork.

Ask Jackley what it means to be an innovative entrepreneur,

and she offers three answers that cut to the heart of this book's

arguments about the democratization of innovation. First, she

defines innovators as those who see possibility in the world and

believe improvement is possible. But she warns that ideas, while

great. do not add up to much, as innovation needs

entrepreneurship to catalyze change: � As an entrepreneur, you

must act every day on execution." Most important is the

collective vision a founder must instill in her team. Shared

purpose leads to inspiration just as surely as the fear of letting

down comrades leads to the perspiration needed to overcome

inevitable obstacles. Everyone has the talent to be an

entrepreneur, she thinks, but not everyone will like the lifestyle.

Reflecting on the decision to leave Kiva. which appears poised

for spectacular growth and innovation (it could evolve into the

first credit bureau for the world's poor, for example) , to start

ProFounder, she confesses that she is absolutely petrified of

failure. �The first time you can get lucky, but the second time you

have to be smart . . . and that's a high bar!" So why leave the

comfort and success of Kiva? �I wanted to apply Kiva's lessons

to another big, but similar, problem," she says. �I wanted to build

something again. " The drive to leave behind comfort and security

to create a disruptive new organization even when confronted by

powerful obstacles and a high chance of failure is the true mark of

an entrepreneur. And by radically simplifying the early funding

process for other entrepreneurs, she is contributing to meta­

innovation-the ongoing innovation in how the world innovates.

Jackley's final inSight is the most incisive. In her public

speeches, she likes to invoke Thomas Kuhn's arguments about

the nature of scientific revolutions and the importance of

paradigm shifts. Asked to explain, she says today is an incredible

time for innovations in how to reach out and help the poor. The

key, though, lies in a change in mind-set. For ages, most of

SOCiety-including her, she admits-thought what the poor

needed was more charity and donor aid. But meeting countless

inspiring but cash-strapped entrepreneurs in Africa and elsewhere

convinced her that the old way was doing more harm than good,

and that "the world's poor are also entrepreneurs and innovators

with tremendous human potential."

The democratization of innovation promises to be an

extraordinarily powerful force shaping the Ideas Economy. In the

future, the difference between success and failure will often be

determined not by lack of access to capital, markets, talent, or

other conventional obstacles. In the age of disruptive innovation,

resourcefulness will matter more than resources-and success or

failure will be determined inside the mind of the innovator. Are

you ready for the revolution?

Conclusion

We Are All In novators Now

Now, more than ever, innovation matters. There is an urgent

need for solutions to the novel problems of the twenty-first

century. Innovators from unexpected corners with unfamiliar

pedigrees are disrupting established business models and

upending entire industries at breakneck speed. But if

entrepreneurs, who are the vital carriers of innovation, are

rewarded for solving socially important problems, greed can

indeed do much good. Innovation could then turn these wicked

global crises into unprecedented economic opportunities.

However, just hP.GHlSP. the worlci np.p.cis innovHtion ;mci

innovation is becoming more democratic, it does not mean the

future is inevitably bright for alL A more likely outcome is that

the world economy is entering a period in which we will see

much more turbulence, which may produce unexpected winners

and losers. Leading economies will be challenged by upstarts.

Established companies in many sectors will be blindsided by

unanticipated threats. Workers, even well-educated professionals

in the middle classes, will find themselves increasingly unable to

compete in a world evolving rapidly beyond their recognition.

Governments, companies, and individuals alike will feel like they

are nmningjust to stand still.

So how to win in this coming age of disruptive innovation?

Elon Musk put his finger on something important in describing

his own path to success forging not one but three disruptive start­

up firms-PayPa!, Tesla Motors, and SpaceX. The right formula

for success as an innovative entrepreneur, he says. is drive times

opportunity times talent. That pOints nicely to a manifesto for

flourishing in the new world economy.

Start with drive. jessica jackley is surely right to insist that

idea generation gets you nowhere unless it is coupled with the

hard slog of execution. Wonderful ideas for improving products,

communities, or the world at large have long been around, but the

innovation process was simply too elitist and closed off in the

past to pick up on many of those ideas. As it opens up, though,

bright sparks anywhere in the world, regardless of status or

corporate affiliation, have the chance to make their mark and

maybe make their fortunes too. What is more, as political and

economic obstacles have faded and information and talent flows

have accelerated, plucky upstarts are creating global

micromultinationals-such as jeff Denby's socially responsible

underwear firm PACT-from day one.

joseph Schum peter hailed the entrepreneur as "the innovator

who implements change within markets through the carrying out

of new combinations." We need to do much more to encourage

such entrepreneurial drive, as it may be humanity's best hope for

increasing productivity growth, speeding the diffusion and

adoption of worthwhile innovations, and tackling the world's

grand challenges. That is because the leading countries of the

world, especially the United States, may be entering a period of

what has been called frontier economics. As older, easier sources

of growth have started to dry up, knowledge-age economies are

relying ever more on innovation to save the day. That requires

start-ups to push the boundaries of technologies, business models,

and social norms.

Jack Hidary is one of those provocateurs who is always

pushing the boundaries of what is possible. He made his fortune

with two technology start-ups, EarthWeb and Dice.com, but he

has been spending most of his money and time trying to kick-start

a clean energy revolution. He joined the board of the X Prize

Foundation and cofounded the Progressive Automotive X Prize,

which sought to develop vehicles that broke the 1 00-mpg barrier.

He worked with several partners to develop the Cash for Clunkers

program, which swapped more than 700,000 cars across the

country in two months for an average gain in fuel efficiency of 62

percent.

In addition to incentive prizes and policy catalysts, he argues

that a new kind of entrepreneurship is required to take on such

big, complicated problems as the move to clean energy. The old

model-he calls it Newtonian-saw a linear path in which

entrepreneurs would start off alone with nothing, stumble on an

idea, lock in their intellectual property, seek out seed funding, go

to alpha and beta testing, and so predictably on. �It was all very

cause and effect, slow to scale, and most ideas got stuck in the

technology valley of death," he says.

In the new quantum approach he advocates, innovative

entrepreneurship happens as a superposition of many

simultaneous possibilities rather than a straight line, and propels

multiple approaches involving entire ecosystems of players

forward at the same time until a shakeout leaves just one set of

winners standing. This is analogous to the wave function in

quantum mechanics, which forces one pathway forward from a

wide range of possibilities.

One of his main goals in clean tech has been to make electric

vehicles accessible to the masses without consumers worrying

about charging and infrastructure. Recognizing that the arrival of

the always-on Internet-supported network enables a new

generation of charging stations and vehicles, Hidary set out to

build a consortium that could make this vision a reality. But

instead of starting a new company, as he had in the past, he

decided to catalyze a new set of consortiums and business models

to push the technology forward. The key barrier to adoption of

these vehicles, he reckoned, was the need for consumers and

businesses to buy the car.

By a clever mix of cajoling, cooing, confronting, and

cooperating with a variety of companies that make up the

ecosystem of car, recharger, and power supplier, he has managed

to forge a breakthrough that allows those firms to push the

technology forward while advancing their own business

differentiation. In mid-201 1 , Hertz announced that it would carry

a large number of electric vehicles for rent in prominent locations

in several countries, and GE came on board to supply the

recharging infrastructure with other partners in tow. Parking

garages, corporate campuses, utilities, and others joined in to roll

out the infrastructure in distributed fashion. To tackle the world's

most wicked problems, he argues, we need a range of tools in the

toolbox-government policy, incentive prizes, industry

coalitions, and so on-and the challenge for the new generation

of entrepreneurs will be how to coordinate all this.

That example shows why companies and countries-not to

mention friends, families, and fools-that remove obstacles from

the path of trailblazing, innovative entrepreneurs such as Hidary

will do better than those who do not. And if you are a person with

a great idea but no business plan, you no longer have an excuse

for sitting on the fence. Thanks to such advances as Web-based

crowdfunding, even very poor people in hardscrabble parts of the

world are now changing the world. So why are you still an

innovator -in-waiting?

If the answer is that you do not know where to look for

opportunity, consider the advice given by the DEeD: the greatest

potential driver of innovation and source of future productivity

gains may well be intangible capital. It is easy enough to spot the

tangible capital in an economy, whether capital equipment and

machinery or buildings and infrastructure. But in the Ideas

Economy, much of the value of firms is not captured on the

balance sheet: it walks out the door at the end of the workday,

trapped in the minds of the best employees. In today's open

innovation ecosystems, one form of intangible capital is the

knowledge networks that link decentralized nodes of open

innovation. Df all the forms of intangible capital that look likely

to drive future growth, the agency thinks the most promising are

advanced software, Big Data, analytics, and design.

Those seem a bit prosaic at first. So to get a sense of the

hidden opportunity here to change the world, take a closer look at

design thinking. Tim Brown, the boss of IDEO, a consultancy

that helped shape Apple's first mouse, does not have solutions to

daunting global problems such as climate change, epidemics, and

persistent poverty. But he believes he knows how to find them:

with design thinking, by which he means the open-minded, no­

holds-barred approach that designers bring to their work, rather

than the narrow, technical view of innovation traditionally taught

at many business and engineering schools. Firms that think like

designers, which means embracing experimentation via rapid

prototyping and fast failure, stand to win huge new markets and

profits. The concept may sound pat and wooly, encompassing

everything from savvier marketing to radical technological leaps.

Yet design thinking is winning many converts in both industry

and philanthropy.

A holistic approach to tackling problems produces more

breakthroughs than does the MBA's traditional urge to make

incremental improvements to existing products or processes. The

traditional uncompromising focus on predictability and quality

control exemplified by Six Sigma, a form of statistical analysis

popular with manufacturers, can lead to "analysis paralysis" by

discouraging sweeping changes that may cause disruptions in the

short term but yield big benefits in the long run. GE is perhaps the

company most closely associated with Six Sigma. but Jeff Immelt

nevertheless thinks there is something to the argument for

stepping out of silos. He is convinced that taking on such

complex challenges as health care and energy, sectors on which

he is betting GE's future, will require systems thinking that

weaves together policy, economics, strategy, and technology in

entirely new ways.

The key is to focus on the needs of people without losing sight

of the big picture. George Kembel, the head of Stanford

University's Institute of Design, points to Embrace, a fledgling

health care firm created by a group of his former students. The

problem they set out to fix was the appalling lack of proper

medical care for premature babies in poor countries. One reason

for this is that sophisticated incubators can cost $20,000 or more;

even if a country receives the machines from donors, the lack of

proper training and money for maintenance undermines their

effectiveness.

Many attempts had been made to reduce the cost of such

incubators, but the Stanford team took a different approach, by

talking to locals in rural areas. In the process, it dawned on them

that most babies in the developing world are not born in hospitals

and so are unlikely to benefit from incubators even if the devices

are working properly. The team designed a cheap and cheerful

proxy: a tiny sleeping bag made of material that, when dipped in

boiling water, retains heat for hours. The drive of these social

entrepreneurs has met clear market opportunity, and they hope to

start selling this $25 "incubator" soon.

Another example of how design can drive innovation and

create opportunity is the democratization of manufacturing that is

under way today. In the past, because the essential tools of the

trade-such as lathes. injection-molding machines, and computer­

aided design systems-were so expensive and large, only

companies with deep pockets could aspire to design and

manufacture new products for the global market. No longer. The

rise of cloud computing and powerful design software, the

miniaturization of essential hardware, and the rapid advance of 3-

D printing are fomenting a manufacturing revolution. At the

forefront of this movement is Autodesk, a California software

firm that has for decades produced expensive 3-D software design

tools for high-end applications (including designing Boeing

aircraft and creating Hollywood films such as A vataI}.

Without the knowledge of Carl Bass, Autodesk's boss, several

younger employees developed cheap and cheerful design

applications for the iPhone and iPad that have become runaway

bestsellers. Bass confesses that if he had been asked, he would

have crushed the project out of fear that it might weaken the

firm's high-end brand. In fact, millions of new users are now

familiar with his brand and existing customers are asking for

more such applications. Bass says, "This was a wake-up call for

us that the world is changing. It took twenty-seven years for us to

get to 12 million units in sales, and now in eighteen months

we've done it again." He argues that the spread of affordable

design software, inexpensive digital fabrication labs, and outfits

such as California's Tech Shop (which aim to do for

manufacturing and design equipment what Kinko's did for

photocopiers) means that everyone can join the "maker

revolution." Bass goes so far as to say that there will be a

renaissance in manufacturing in America-"as long as we

redefine what manufacturing means."

And what about talent? Elites have long sniffed that when it

comes to talent, either you've got it or you don't-but that view

no longer holds in a world of democratic innovation. Every one of

us has had an aha moment. after all. and the right sort of

education and training can develop intangible skills and unleash

the innovator trapped inside. At the level of many national

economies, there is a massive talent crunch coming due to

demographic trends that will produce a shock not seen since the

Middle Ages. Experts at the World Economic Forum and the

Boston Consulting Group have calculated that the working-age

populations of many developed economies will start to shrink

shortly, and they predict that "numerous organizations will be

unable to find enough employees in their home markets to sustain

profitability and growth." By 2050, the global population of those

over sixty is predicted to exceed those under fifteen for the first

time in history.

There is no easy answer, so countries need to try out a mix of

policies to deal with the problem. Part of the solution is to

encourage more skilled migration, as increased talent mobility is

part of the solution. Again, think brain circulation, not brain

drain. Those countries that do not, because of xenophobia or other

factors, will risk losing out. Anticipating future skills shortages

and encouraging public-private partnerships to retrain workers

will help, as will tax incentives for businesses to invest more in

training workers. Companies will also have to redouble efforts to

diversify their workforces, scouring previously neglected

demographics (the disabled everywhere, the elderly in developed

countries, or women in emerging markets, for example) to find

and develop talent.

However, the key to the development of talent lies in the

hands of the individual. On this front, there is bad news and good.

The bad news is that in many countries, official school systems

and universities will not prepare you for the twenty-first-century

innovation economy. In America, many public schools have

notoriously been falling further behind international benchmarks

for quality. But there is also cause for concern in Asian countries

that celebrate "tiger moms" and produce high-scoring students,

because much of the education in such systems emphasizes rote

learning; critical thinking, a willingness to challenge conventional

assumptions, and creativity often lose out.

The good news is that thanks to the new tools of the

information age, it is now easier than ever to take charge of your

own education. If the local school system does not provide strong

science education, go online and contract with an inexpensive

tutor from Kerala. If your child's math skills are falling behind

those of her peers, improve them using the Khan Academy's

excellent free lectures on the Internet-as over one million

students already do. If it is more advanced skills you wish to top

up, check out the many free courses that universities such as MIT

now place online. If ideas and argument are more your cup of tea,

follow the provocative series of free TED talks online and in real

life at the thousands of TEDx events now popping up around the

world.

In the age of disruptive innovation, the competitive edge may

well go not to the smartest or wealthiest but to those who best

learn how to keep on learning throughout their lifetimes. This will

not be easy, because while the top-down system of mass­

produced education that suited the industrial revolution has

become obsolete, no coherent and clear system has risen to take

its place. A fancy degree from Harvard Business School may not

mean the same anymore, argues Christensen, observing that even

business professors such as he are becoming obsolete thanks to

online offerings. Reflecting for a moment on the prospect of the

very same sort of disruptive innovation he has championed for a

lifetime putting him out of business, he smiles broadly. That

would be a fitting tribute to a man who, along with the late Peter

Drucker, has done more than anyone to advance thinking on

innovation.

Decades ago, at a time when many thought innovation was

mostly a fringe activity to be relegated to the long-haired creative

types, Drucker saw �innovation and entrepreneurship as

purposeful tasks that can be organized-are in need of being

organized. " Though it may never become a quantifiable science,

innovation is indeed evolving rapidly from a dark art to

something resembling a mainstream practice. As the shroud of

mystery fades, the process is becoming more accessible and a

useful set of tools and rules is emerging. In that spirit, here are a

handful of the most important new rules for the age of disruptive

innovation.

The Disruptive Dozen: The New Rules of Global

Innovation

The very way in which we innovate is being reinvented, with

wonderful but often unexpected consequences. If you want to

prosper rather than perish in this coming age of disruptive

change, you need to master the new rules of global innovation:

1 . Innovation is not a zero-sam game. China's rise

does not mean America's decline-but the rising

tide will lift your boat only if you patch the holes in

it first.

2. Think locally, act globally. Many of this century's

thorniest problems-food and water scarcity, health

scares-seem like local problems. In fact, they often

arise from failures in national and global

governance. Creative coalitions, regional

approaches. and systems thinking are the way

forward.

3. Turn risk into reward through resilience. Leaders

must realign incentives for the private sector to

build resilience into future infrastructure and supply

chains. The key is to shift from brittle, top-down

systems to modular, flexible approaches that are

more future-proof.

4. Open ap and say . . . aha! Ivory towers are so

yesterday. Open and networked innovation

recognizes that the smartest people in your business

no longer work inside your firm.

5. Be the dinosaar that dances. It may be unsexy to be

the incumbent firm in an industry undergoing

disruption by nimble upstarts, but that is no reason

lu sLand sLi11. Leverdge yuur legacy asseLs, and diLch

outdated business models even if they are profitable

today but do not have a future.

6. Elegant frugality tramps conspicuoas consumption.

The fallout from the great recession is clear.

Consumers in developed countries, not just poor

folk in emerging markets, want products and

services that offer better value.

7. If at first YOll don 't sllcceed, fail, fail again.

Transform your attitude toward risk so that you

celebrate fast failure. It is not easy to fail elegantly.

8. Forget Father-it's the llser who knows best.

Bottom-up innovation works much better than the

top-down kind. When customers help you create

your products and services, the resultant ecosystem

gives your firm the edge.

9. Go whole hog. As the life cycle costs and

externalities involved with economic activity get

priced into goods and services, systems thinking

will beat silos.

10. The path from stagnation to rejllvenation rans

throllgh innovation. Easing the middle-class squeeze

seen in many developed economies will mean

improving productivity and boosting economic

growth. The best way to do this is to invest in the

long-term drivers of innovation such as education,

research and development. and smart infrastructure.

1 1 . Pllt pl1lpose on par with profits. In the Ideas

Economy, money will no longer be a sufficient

motivator of talent. Look to emerging business

models of social entrepreneurship and hybrid value

chains for inspiration.

12. Keep relearning how to learn. Each of us has an

innovator trapped inside, and today's innovation

revolution promises to be much more democratic

than the past-but you cannot rely only on

traditional schools, fancy diplomas, and employers

any longer. You must constantly work to figure out

how innovation is evolving so that you can

participate and prosper.

The democratization of innovation, once the preserve of

technocratic elites in iVory towers, offers hope that the grand

challenges of this new century can indeed be tackled. Ever deeper

waves of innovation could, in time, even transform a world of

scarcity and conflict into one of abundance and prosperity. That is

because as the potential of seven billion innovators-in-waiting is

unleashed, mankind will at last be tapping fully the one natural

resource that we have in infinite quantity: human ingenuity.

Acknowledgments

A great number of people have contributed to the making of this

book, and I am grateful to all of them.

First, I thank John Micklethwait, the editor-in-chief of The

Economist, for giving me time to write this book and for giving

me permission to use articles that I have written for the magazine.

I also thank Daniel Franklin and other editors and colleagues for

their encouragement of this project.

Many of the themes, characters, and arguments found in this

book were inspired by real-life conversations and debates that

took place on the Ideas Economy stage

(www.ideas.economist.com). This is a path-breaking series of

innovation conferences and multi-media events started a few

years ago by The Economist. I have had the privilege of chairing

this series, and the pleasure of working closely with the sparky

people curating the content. Justin Hendrix, Sean McManus, and

the entire Ideas Economy team deserve tremendous praise for

their efforts.

I have also been fortunate to have sharp people outside The

Economist supporting my efforts. I am grateful to Andrew Wylie,

my agent, for fighting in my corner; I also thank Scott Moyers for

his invaluable early support. I had a hunch when I first spoke with

Hollis Heimbouch about innovation that she would be the perfect

editor for this book-and her wise and graceful edits certainly

proved me right. I thank her and the entire team at HarperCollins

for their fine work.

Finally, I am grateful to my wife, Michelle, for both her

unflagging support and her keen editorial judgment. In addition to

insightful comments on impenetrable draft chapters, she also

offered a timely and incisive critique of the book's structure that

led to a vital mid-course correction. All that, even as she had her

hands full with much more important matters.

To Michelle, to all my long-suffering friends and family, I say

thank you from the bottom of my heart.

Notes

The pagination of this electronic edition does not match the edition from which

it was created. To locate a specific passage, please use your ebook reader's

search tools.

Please note that the Web links below were functional when this hook went to

press, but of course such links often change. Where possible I have tlied to give

relevant details (such as time and place of a speech. etc.) associated with a link

so that the determined reader can Google her way 10 the desired information

even If the link no longer works.

Introduction

16 the world's wicked problems: This term of art has a long and tich history.

For more, see Horst Rlttel and Melvin Webber. "Dilemmas in a General

Theory of Planning. � Policy ScieJ1ces 4 (1973); and more recently, John Kao's

�What Is Large Scale Innovation," 2009, www.johnkao.comILarge%20Scale%

20lnnovation.pdf.

Chapter 1 : Wicked Problems, Wiki Solutions

22 Can you change the world: Jeff Denby gave a lively presentation of his

business strategy at this Ideas Economy event In March 20 I 0:

http://ldeas.economjst.comlpresentatlonlsustalnable-underwear.

26 Geoffrey West: West presents his arguments on the role that scaling plays

In driving Innovation at this Ideas Economy event on Intelligent Infrastructure

In September 2010. Careful listeners will catch his off-color description of the

Singularity concept (described in Chapter 4), which he thinks Is complete bunk:

http://ldeas.economlst.comlpresentatlonlurban-physics.

26 More amazingly, the rise of those economies: For a good overview of the

prospects for ending absolute poverty in this century, see Jeffrey Sachs. The

Fnrl nf Pnvprty,' Fr:mmmir: Pn,<;<;ihilifip..'i fnr nllr Timp (Np.w York' Pp.nguln.

2005). Note I mean absolute poverty, as measured by such objective standards

as the UNDP's human development metrics, not relative poverty. In that sense,

the Good Book Is right, as Income Inequality will always be with us.

27 The World Economic Forum has dubbed this: The World Economic

Forum's work on this topiC Includes a thoughtful report highlighting the

Interlinkages: " Water Security: The Water-Energy-Food-Climate

Nexus� (2011), www.weforum.orglreportslwater-security-water-energy-food­

climate-nexus.

28 William Baumol: For a masterly analysis of entrepreneurship through

human history, see David S. Landes, Joel Mokyr, and William 1. Baumol, eds.,

The Invention of Enterprise: Elllrepreneurship from Ancielll Mesopotamia to

Modem Times (Princeton: Princeton University Press, 2010). See also this

entertaining romp through the history of Innovation with two grand masters,

Baumol and Harold Evans, at this Ideas Economy event in March 20 II :

http://ideas.economlst.comlvideo/masters-innovation.

30 Larry Brilliant: For an overview of the grand global challenges of the

twenty-first century, see " Sustalnlng Humanlty,� a lecture he gave at the

University of Michigan on March 16, 2011:

http://lecb.physlcs.1sa. umlch.edulCWIS/browser. php?ResourceId=4021 .

33 Jung is a cofounder: Many In Silicon Valley maintain that Edward Jung

and his more famous cofounder. Nathan Myhrvold (the former chief

technology officer of Microsoft), are opportunistic patent trolls. Intellectual

Ventures has In the past fiercely rejected this label. Pressed on this point during

an Interview in May 20 II , the amiable Jung insisted his firm was chiefly about

long-term investments-but he acknowledged that it was something of a patent

troll as well.

36 Beware the Superbug: The parts of Chapter 1 dealing with bactetial

superbugs draw on analysis done for an Economist briefing on the same topic. I

thank my colleagues and collaborators in that effort. Natasha Loder and

Geoffrey CaIT.

Chapter 2: Cheap and Cheerful

56 This so-called localized modularization approach: The arguments put

forward by John Seely Brown and John Hagel on Chinese innovation are found

in their ··Globalization and Innovation: Some Contrarian Perspectives.'· a paper

prepared for the annual meeting of the World Economic Forum. Davos.

Switzerland. January 25-30. 2006. www.Johnseelybrown.com/davos.pdf.

57 Aravind, a pioneering Indian eye hospital chain: Though C. K. Prahalad

first brought the Aravind story to global attention. a number of Independent

studies. including by leading business schools. have validated Aravind·s model.

A good recent analysIs Is found in Suchitra Shenoy and Pavithra Mehta.

IJ1finile Vision: How Aravind Became the World·s Greatest Business Case for

Compassion (San Francisco: Berrett-Koehler. 2011).

63 For example, says Christopher Wasden: The PWC Innovation Scorecard

for the global medical devices sector. published in January 2011. is found here:

http://pwchealth.com/cgl-locallhregister.cgl?link=regJlnnovation-scorecard.pdf.

Chapter 3: Of Stagnation and Rejuvenation

69 the transformative power of mobile telephony: For more on how cell

phones and related technologies have impacted the lives of the bottom billion.

see Vital Wave Consulting. mHealth for Developmef1l: The Opporlllnity of

Mobile Technology for Healthcare in the Developing World (W"ashlngton. DC:

UN Foundation-Vodafone Foundation Partnership. 2009).

www.globalproblems-globalsolutlons­

files.orgJunLwebsite/assetslpubllcations/technology/mhealthlmHealth_for_DevelopmenLfull

and Isaac Mblti and David N. Wei!. �Mobi!e Banking: The Impact of M-Pesa

in Kenya.� National Bureau of Economic Research. NBER Working Paper No.

17129. June 2011. www.nber.org/paperslwI7129.pdf.

71 Though some dismiss any talk of a middle-class squeeze: Barack Obama

has often commented on the middle-class squeeze, for example, during his

State of the Union speech of 2010. Ronald Haskins made his observation

during "America's Endangered Middle Class: Exploring Progressive and

Conservative Remedies,� an event organized in February 2011 by the

Brookings Institution In Washington.

72 Consider the evidence: The best data sets for working out the Glnl

coefficient and other metrlcs relevant to income Inequality in America are

maintained by the Internal Revenue Service and the U.S. Commerce

Department.

Tt. Alan Greenspan: He made similar comments at various times, but most

notable was during congressional testimony given In June 2005. See Peter

Grier, "Rich-Poor Gap Gaining Attention," Christian Science MonilO/� June

14, 2005, www.csmonltor.coml2005/0614/pOls03-usec.html.

74 Indefensible as these are: For a thoughtful take on the broader Implications

of tax breaks for employer·provided health Insurance, see Len Nichols and

Sarah Axeen, �Employer Health Care Costs in a Global Economy: A

Competitive Disadvantage for u.s. Firms," New America Foundation policy

paper. May 2008,

www.newamerlca.netlpubllcations/pollcy/employechealth_costs...globaLeconomy,

and Jonathan Gruber, �The Tax Exclusion for Employer-Sponsored Health

Insurance,� National Bureau of Economic Research, NBER Working Paper No.

15766, February 201 0, http://econ·www.mlt.edultllesl6404.

77 What should one make of this: The McKinsey Global Institute has done

quite a bit of work on productivity growth versus stagnation. The consultancy's

website ran a debate between Tyler Cowen and two MIT experts, Andrew

McAfee and Erik BrynJolfsson: 'The Debate Zone: Has the U.S. Passed Peak

Productivity Growth?"

http://whatmatters.mcklnseydigltal.comlthe_debate_zone/has-the-us-passed­

peak-productivlty-growth.

79 Angus Maddison: Much of Maddison's work can be found on his website,

www.ggdc.netlMADDlSON/oriindex.htm. Since his passing, a group of

dedicated scholars has maintained another site, which publishes work done in

the same spirit: www.ggdc.netlmaddlson.

80 For example. health care gobbles up: See, for example, the DECD's

ongoing work on health Indicators across the developed world at their website,

OECD.StatExtracts: http://stats.oecd.orglindex.aspx.

84 In early 2011, Ben Bernanke: His speech, �Promollng Research and

Development: The Government's Role,H given at the conference "New

Building Blocks for Jobs and Economic Growth,� Washington. DC, May 16

2011, can be found at

www.federalresetve.gov/newseventslspeechlbernanke20110516a.htm.

86 The great Victorian age of invention: For more on this topic, see Vac1av

Smil's scholarly Transforming the Twentieth Century: Technical InfJovations

and Their Conseqllences (New York: Oxford University Press, 2005), and my

colleague Tom Standage's delightful book on the age of the telegraph. The

VictoriaJl Internet (New York: Walker, 2007),

http://tomstandage.wordpress.com/bookslthe-vlctorian·interneI.

87 The American financial industry: A provocallve report on this topic is

Paul Kedrosky and Dane Stangler, �Financializallon and Its Entrepreneurial

Consequences,H Kauffman Foundallon Research Series: Firm Fonnallon and

Economic Growth, March 2011,

www.kauffman .0rgluploadedFileslfinanclalization_reporL 3-23·1 1 . pdf.

Chapter 4: The Singularity and Its Discontents

93 Time even put the Singularity on its cover: Lev Grossman, "2045: The

Year Man Becomes Immortal.H Time, February 19, 2011,

www.time.com/lime/heaJth/artic1e/O.8599.2048138-I .OO.html. Singularitarlans

often check out Kurzwell's website at www.kurzweilal.net.

94 One man who was not at all surprised: Vlvek Kundra. who served as the

Obama White House's chief information officer until mid·2011 , Is a believer In

the Singularity. See �An Intetvlew with Vivek Kundra,"

http://ldeas.economlst.comlpresentallonllnterview·vivek·kundra.

96 Even in the heart of Silicon Valley: The skepllcal gathering was one of the

many spontaneously organized "unconference" sessions at the annual SciFoo

conference, a marvelous event organized by Coogle and O'Reilly Media.

Several hundred of the world's very sharpest scientists and technology experts,

Coogle's founders Larry Page and Sergey Brin, and a few lucky Journalists

come together for a weekend of provocallon and prognostication. There Is no

prearranged agenda whatsoever. merely a set of large white boards, empty

meeting rooms, and lots of good food and wine,

98 His magazine ran a damning critique: Mark Anderson, "Never Mind the

Singularity, Here's the Science,H Wired, April 2008,

www.\vired.comlmedtechidrugsimagazlne/16-04/fLkurzweILsb.

98 "Forget the Singularity": Juan Enriquez's essay was published by the

Technology, Entertainment and Design (TED) conference's publishing arm In

2011. A detailed book building on the essay Is forthcoming, but this talk covers

the key points of his argument:

www.ted.com/talks/Juan_enrlquez_shares_mlndbogglin�new_science.htm!.

99 There is reason to think all of this talk: See "The DECO at 50: Science

and Technology, 2010,"

100 William Nordhaus: See William 0, Nordhaus, "Two Centuries of

Productivity Growth In Compullng,H Journal of Ecollomic History 67, I

(March 2007),

100 For example, the 2030 Water Resources Group: Not to be confused

with the Water Resources Group, a for-profit firm, the 2030 Water Resources

Group Is a collection of leading experts and public figures concerned about the

global water problem, See its "Charting Our Water Future: Economic

Frameworks to Infonn Decision-Making," 2009,

www.2030waterresourcesgroup.com/watecfuli/Chartln�OucWater_Future_Fina!'pdf.

105 Paul Saffo: Saffo makes the argument that the Singularity will come, but

�we won't even notice,H Views of the future of Innovation put forth by

Google's Hal Varian and Paul SaITo, offered at the start of an Ideas Economy

conference In March 2011, are found here: http://blt.ly/gbQY8a.

Chapter 5: So Long, Silo

109 The only way forward, the firm decided: The HaIVaro Busilless Review

published "Connect and Develop: Inside Procter & Gamble's New Model for

Innovallon H In March 2006; it ran a story reviewing that program's progress,

�How P&G Tripled Its Innovallon Success Rate,H In March 2011.

114 Big-company bosses have figured out the bottom line: The source for

these R&D figures is Henry Chesbrough,

117 Studies have shown that how people relate to the products they use:

See, for example, work by NYU's Sinan AraL

121 What's more, at times hardly 1 percent: See, for example, work by the

Wharton School's Peter Fader.

123 as typically happens in incentive prizes: For an academic investigation

of prizes, see Brian Wright, "The Economics of Invention Incentives,"

American Economic Review, September 1983, See also V, V, Chari, Mikhail

Golosav, and Aleh Tsyvinski, "Prizes and Patents: Using Market Signals to

Provide Incentives for Innovations," Working Paper 673, Federal Reserve

Bank of Minneapolis, Research Department, August 2009,

127 Happily, the Board of Longitude: See Dava Sobel's lively history of this

prize, Longitude: The Tme StOlY of a Lone Genius Who Solved the Greatest

Scielllific Problem of His Time (New York: Walker. 1995),

128 When Lindbergh's plane went on a national tour: The estimate of the

number of people who saw the plane comes from Peter Diamandis,

129 McKinsey did a thorough global review: McKinsey & Company, "And

the Winner Is , , Captuling the Promise of Philanthropic Prizes," 2009,

www.mckinsey.comlapp_medlalreportslsso/and_the_winner_is.pdf.

129 A study led by Liam Brunt: Llam Brunt, Josh Lerner, and Tom Nicholas,

"Inducement Plizes and Innovation," Centre for Economic Policy Research,

CEPR Discussion Paper No, DP6917, July 2008; an abstract is at

hllp :l/papers,ssrn. comlsol3/papers,cfm ?abstracUd= 1307507##,

131 A study co-authored by Karim Lakhani: See Karim R Lakhani, Lars Bo

Jeppesen, Peter A, Lohse, and Jill A Panella, "The Value of Openness in

Scientific Problem Solving," Harvard Business School, HBS Working Paper

07-050, January 2007, www,hbs,eduJresearch/pdfl07-050,pdf.

132 Thomas Kalil: Before he Joined the White House as a science advisor,

Thomas Kalil was an advocate of government embracing Incentive prizes, See

"Prizes for Technological Innovation," Brookings Institution, Hamilton Project

Discussion Paper 2006-08, December 2006,

www, brooklngs,edu! -/mediaiFiles/rdpapersl2006/12healthcare_kaliU200612kaliL pdf.

Chapter 6: Black Swan Kills Sitting Duck

138 Consider violence: Steven Pinker lays out his arguments on violence at

this Ideas Economy event In September 2010:

http://ldeas.economist.comlpresentatlonlhlstory-vlolence.

139 More than half a century after the height of the Cold War: So how

does Martin Rees Justify his suggestion that mankind might have only a 50-50

chance of surviving the twenty-first century-our final hour, to use the alarmist

title of his book? Rees took my review copy of Our Final Century (as the

British edition of his work was called) and penciled In a question mark after the

title. He said his British publishers had ruled the question mark out. He Insisted

that the American publisher. Basic Books, even changed the title from Our

Final Century to Our Final HOllr upon publication In 2003. Reese Is clever

enough to know that the end Is not nigh, but he put up with the chicanery In

order to gain a wider audience. A small sin, perhaps, In such an Important

book.

140 Consider, for example, the mysterious decimation: For more on the

trouble with the bees. see ··UN Report Warns Bees Now Disappearing

Worldwide,'· The Extinction Protocol, March 22, 2011,

http://theextlnctlonprotocol. wordpress.coml20 11/03/22/un-report -warns-bees­

now-dlsappearlng-worldwide.

143 Every year, the World Economic Forum: For more on the WEF's

ongoing work and analysIs of risk Issues, Including Its new initiative to create a

global risk response network that could serve as an early warning system for

systemic risks. see the page on ··Global Risks" on the WEF's website,

www.weforum.orglissueslglobal-risks. Please note: I serve as an advisor on

sustalnabllity Issues to the WEF·s Global Agenda Council network, but I

played absolutely no role In developing the WEF's correct predictions of global

financial troubles. Also, on the rising cost of disasters, see the analysis done by

Swiss Re's experts at www.swlssre.com/sigma.

146 Global CalastroplJic Risks: Nick Bostrom and Milan Clrkovlc, eds.,

Global Catastrophic Risks (New York: Oxford University Press, 2008),

www.global-catastrophlc-rlsks.com/docslglobal-catastrophic-risks.pdf.

149 The Rockefeller Foundation asked: Rockefeller Foundation and Global

Business Network. �Scenarios for the Future of Technology and International

Development." May 2010,

www.rockefellerfoundatlon.orgluploadslfileslbba493f7-cc97-4da3-

add6-3deb007cc719.pdf.

156 great promise in using genetic science to feed the world: For more on

how the global spread of genetically modified crops has taken place safely and

to the great benefit of farmers in the developing world, see the annual reports

put out by ISAAA at www.lsaaa.org. I do believe that activists have a

legitimate point in arguing for prudent regulations and for keeping a watchful

eye on possible health. safety, and environmental issues-but two decades of

expetience across the world proves their wilder claims wrong and their

obstructionist approach in Europe misguided. The concerns expressed by some

that rapacious multinational corporations would use CMOs to trap small

farmers Into a new cycle of poverty are also important to note. On this score,

the embrace by China and other emerging markets of this technology offers

hope: even the chief technology officer of Monsanto acknowledges that a lot of

the innovation in GMOs is shifting rapidly away from the developed world

toward the research laboratories of such countries.

Chapter 1: The Sputnik Fallacies

164 the Gathering Storm: This report can be found at the National Academies

Press website, www.nap.edu.

166 If China is up, then the United States must be down: Much of the

concern about America's loss of competitiveness centers around the decline in

manufacturing employment-remember Ross Perot's warnings about the

�sucking sound� of Jobs moving to Mexico because of NAFfA? New research

Into the matter, done by the Boston Consulting Group, suggests that

manufacturing and other Jobs are, In fact. coming back to the United States

(�Made In the USA, Again: Manufacturing Is Expected to Return to America

as China's Rising Labor Costs Erase Most Savings from Offshorlng," Boston

Consulting Croup press release, May 5, 2011,

www.bcg.com/medialPressReleaseDetails.aspx?id=tcm: 12-75973). One reason

for this is that the wage gap with India and China Is, due to rising wages in

those countries, much smaller than it was twenty years ago. Another reason,

says GE's boss Jeff Immelt, Is that it Is harder and more expensive to get

educated and motivated employees in those countries now that they have plenty

of other opportunities. His firm is currently moving call centers back from

India to the United States, and he claims the wages are only about 10 percent

more expensive in America for comparable workers. He predicts firms will

keep manufacturing Jobs relevant to servicing emerging markets in those

markets, but bring back jobs that Involve making stuff for Amerlcans-a move

that has pleasing side benefits in reducing supply chain risk.

169 Research done by Vivek Wadhwa: See, for example, Gary Gereffi,

Vivek Wadhwa, Ben Rlsslng, and Ryan Ong, "Getting the Numbers Right:

Internallonal Engineering Educallon In the United States. China, and India .. ·

Journal of Engineering Education 97. I (2008) : 13-25. For his forceful and. In

my view, correct arguments for reforming Ametica· s Immlgrallon laws, see

Vivek Wadhwa, ··Our Best Imports: Keeping Immigrant Innovators Here,··

Democracy Journal 21 (Summer 20 II).

171 The latest five-year plan from Beijing's technocracy: For more on

China's Innovation ambitions, see China's 12th Five-Year Plan (2011-2015),

www.gov.cn/english/201 1-03/05/contenCI816822.htm: ··Hearing on China's

Five-Year Plan, Indigenous Innovallon and Technology Transfers, and

Outsourcing," June IS, 2011, U.s.-China Economic and Security Review

Commission.

www.uscc.govlhearlngS/20I lhearlngs/wrlltelueslimonlesihrl l_ 06 _15. php:

also see Dieter Ernsfs work at the East-West Center.

172 The DECO recently examined China's innovation policies: GECD

Reviews of Innovation Policy: China (paris: OECD. 2008),

www.OECD.org/stillnnovalion/revlews/china.

175 Schloss Leopoldskron: The cognoscenll will have recognized this as the

setting for The Sound of Music.

176 Samuel Kortum and Josh Lerner: Samuel Kortum and Josh Lerner,

H Assessing the Contrlbullon of Venture Capital to Innovallon,·· RAND jOllrnal

of Economics 31, 4 (Winter 2000) : 674-92,

http://home.uchicago.edulkortumlpaperslrje_2000.pdf.

184 The Council on Competitiveness: The papers referenced here, as well as

much other research of relevance to nallonal compeliliveness, can be found at

www.compete.org.

186 Giving faculty and employees of government laboratories: See the

provocallve arguments made on this topic by Robert Utan and the Kauffman

Foundallon. On the striking Supreme Court decision on academic innovators,

contrast the New York Times edltotial denouncing It with Vivek Wadhwa's take

on the matter: "Innovallon's Golden Opportunity," Washington Post, June 10,

2011, www.washingtonpOSl.com/nationaUon-lnnovatlonsJinnovations-golden­

opportunity/20 1 1/06/091 AGWrnlOH_story.html.

186 encouraging innovative entrepreneurship: The topic of entrepreneurship

was explored in some detail with leading academic experts (among them UC

Berkeley's Henry Chesbrough and Babson's Daniel Isenberg), government

figures (Aneesh Chopra. the White House's chief technology officer) and

cutting-edge entrepreneurs (among them SpaceX"s Elon Musk and Twitter's

Jack Dorsey) at the Ideas Economy event held In March 2011. The full two-day

event can be viewed on www.foratv.com for a fee, or tantalizing tidbits can be

viewed for free at www.ldeas.economist.com. Look In particular for the

explanation from TrueCar" s Scott Painter (a remarkable serial entrepreneur

who has raised over $1 billion for several dozen firms he has started) of why he

refuses to hire any entrepreneurs at his firms.

186 While in the past most start-ups targeted local markets: Daniel

Isenberg has written much about entrepreneurship that Is worth reading. See,

for example, his -The Global Entrepreneur,'· Harvard Business Review,

December 2008, http://hbr.orgl2008/12/the-global-entrepreneur/ar/l .

188 AnnaLee Saxenian: The comparison of Silicon Valley and Route 128 was

made In an earlier work of hers, Regional Advantage: Culture and Competition

in Silicon Valley and Route 128 (Cambridge, MA: Harvard University Press,

1994). Her more recent and equally worthwhile book, The New Argonallls:

Regional Advantage in a Global Economy (Cambridge, MA: Harvard

University Press, 2006), shows exactly why Immigrant networks connecting

Silicon Valley with hot spots of global innovation like Israel. Taiwan, and

southern India should be viewed as brain circulation rather than brain drain.

190 Yes, really: The French government's sovereign wealth fund. Fonds

Strategique d'Investissement, put $3.1 million Into Meccano, a local toy

manufacturer. Why making those toys in France, as opposed to making them

anywhere else, Is of "strategic'· import was not disclosed, perhaps for national

security reasons.

191 This is especially true in energy: See Richard Newell discuss the fine

book on energy innovation edited by him and Hatvard's Rebecca Henderson

(Accelerating Energy Innovation [Chicago: University of Chicago Press,

2011)) at an Ideas Economy event held In September 2010:

http://ideas. economlst.comJpresentatlonllnterview -richard-g -newell;

Henderson's comments on this and related topics are found here:

http://ldeas,economlst.comlpresentatlonlcapltalism-and-climate-change,

194 In contrast, Canada's tax law: See the OECD's comparative analysis of

national innovation policies for more on this point.

194 However, there are worrying signs: I think there is a real danger that

efforts at developing smart grids or electronic health records, done In the name

of enhancing national competitiveness, will be co-opted by the technology

firms that are most favored by politicians In Beijing and Seoul or who have the

best lobbyists in Washington and Brussels, One proposal now making the

rounds that would address this problem of elite capture Is for the creation of a

Sustainable Energy Free Trade Agreement. or SEFTA (see

www.youtube.com/watch?v=IB_wIZ30FZO). Such an accord would differ from

the WTO's frustrated efforts at a new global trade pact in that It would be only

for a coalition of the willing: those countries that want to go further than global

norms on standards harmonization, market access, subsidy withdrawal, and so

on are free to do so-and laggards are welcome to join later. There is a

precedent for this in the information technology free-trade accord reached

during the Clinton administration, which has proved to be GAlT and WTO

compatible, Please note: My role here is merely as an advocate of this idea,

Credit for It goes to the entire sustainable energy Global Agenda Council that I

chaired for the World Economic Forum, especially to Michael Liebreich, Peter

Brun, and Busba Wongnapaplsan,

195 the best industrial policy is probably no industrial policy: See Clay

Christensen's observations on why government intelVention often stifles

innovation here: http://ideas,economlst.comlvideo/lnnovattonand-government­

interventlon-O,

Chapter 8: Can Dinosaurs Dance?

200 That points to several of the big lessons: For a useful take on how

managers at incumbent firms, who face the unenviable task of delivering short­

term profits even as they invest In the Innovations that drive long-term results,

can cope, see VlJay Govindarajan and Chris Trimble, "Stop the Innovation

Wars," Harvard Bllsif1ess Review, July-August 2010,

200 experiment more readily, failing faster: There Is no shortage of books

and articles on the Importance of experimentation and failure In the innovation

process. My favorite site is the courageous one maintained by Bessemer

Venture Partners, arguably the oldest extant VC firm in America. that tracks

the firm's biggest failures over the years

(www.bvp.comlportfolio/antiportfolio.aspx) . Fascinating work is being done at

the Stanford Institute of Design on novel approaches to innovation that

incorporate design, rapid prototyplng, and fast failure. See also Tim Harford,

Adapt: Why Success Always Starts with Failure (New York: Farrar, Straus and

Giroux, 2011). A number of leading thinkers, ranging from John Sexton and

Shirley Tilghman, who are respectively heads of NYU and Princeton, to Steven

Pinker and Clay Shirky, give their Insights on failure at " The Ideas Economy,

Failure, and Innovation," PopTech, http://poptech.orglthe_ldeas_economy.

201 Intuit, a California firm: Intuit's progress In opening up its innovation

process is reviewed in Roger L. Martin. "The Innovation Catalysts," Harvard

Busif1ess Review, June 20 I I , http://hbr.orgl2011106/the-lnnovation­

catalysts/ar/1 . You can hear Scott Cook present various Ideas of his at Ideas

Economy events (www.ldeas.economlst.com).

202 Two decades ago: David Gelernter. "Surviving the Unabomber,H Big

Think, April 27, 2010, http://bigthlnk.comlldeas/19763. He spoke about the

prospects for, and perils arising from, Intelligent infrastructure at this Ideas

Economy event in September 2010:

http://ldeas.economlst.comlpresentationlhuman-network.

203 McKinsey futurologists: See Jacques Bughln, Michael Chul. and James

Manylka, " Clouds, Big Data and Smart Assets," McKif1sey Quarterly, August

2010. See also recent in-depth reports by the firm on Big Data and

productivity.

204 "A BMW is now actually a network" : While the hydrogen-powered

roadster is a sexy and potentially tiber -green idea (If the hydrogen Is made from

renewable sources) , It is one that is ahead of Its time. BMW developed the

Hydrogen 7 to the point where It was ready for full commercialization, but

because the market for hydrogen and fuel cells (a related technology) never

materialized, the German finn never put this model into production.

208 reverse innovation: For more on reverse Innovation, Including how It

compares with the notion of disruptive Innovation, see VUay GovindaraJan's

articles In Harvard Busif1ess Review and his postings on his blog:

www.vlJaygovindaraJan.com.

211 Andy Grove: For more on Andy Grove, see both his books and the

authorized biography by Richard Tedlow, Andy Grove: The Life and Times of

an American (New York: Portfolio, 2006),

215 The best such nugget . . . is Kaiser Pennanente: For more on Kaiser

Permanente's success in using electronic medical records to Improve patient

outcomes, see various articles In Health Affairs, including Catherine Chen et

aL, "The Kaiser Permanente Electronic Health Record: Transforming and

Streamlining ModaJities of Care,� Health Affairs 28, 2 (March-April 2009):

323-33, hup:llcontent. healthaffalrs,orglcontentl28/2/323,abstract, and Yi

Yvonne Zhou et aL, "Improved Quality at Kaiser Permanente Through E-Mail

Between Physicians and Patients," Health Affairs 29, 7 Ouly 2010): 1370-75,

hllp:l/content.healthaffalrs,orglcontentlZ91711370,short,

Chapter 9: Greed for Good

219 A big problem for the future of capitalism: For more on proper

accounting of natural capital, see works by Amory Lovins of the Rocky

Mountain Institute, including Natural Capitalism: The Next Industrial

Revolution (Great Barrington, MA: E, F. Schumacher Society, 2003). On

cradle to cradle analysis, see Bill McDonough's writings and the work of his

Cradle to Cradle Products Innovation Institute (www,c2ccertifled.org),

220 Financial experts see the beginnings: In December 2010 J P. Morgan

released a report done In collaboration with the Rockefeller Foundation,

�Impact Investments: An Emerging Asset Class," that argued that Impact

investing could become an asset class \vith value in the range of $400 million

to $1 trillion, To Investigate the underlying assumptions, see the full report

here: www,rockefellerfoundation,orglwhat-we-do/current-worklharnesslng­

power -impact-Investing/publications,

220 Jack Welch: On Welch's apparent U-turn (some still claim he has not

changed his position at all) , compare his comments made In 1981 wuh this

interview given to the Financial Times In March 2009:

www.ft.comilntl/cmsisiO/294fflf2-0f27-1 1de-

ba 1 0-0000779fd2ac, html #axzz 1 Re 1 HSmap,

222 Roger Martin: Martin spells out his views on the evolution of capitalism

in �The Age of Customer Capltalism,H Harvard Business Review, January­

February 2010.

226 Bill Drayton: Drayton summarizes his worldview in �Tipping the World:

The Power of Collaborative Entrepreneurship," What Matters, McKinsey

Publishing, April 8, 2010,

http://whatmatters.mckinseydigital.comlsociaLentrepreneurs/tipping-the­

world-the-power-of-collaborative-entrepreneurship, David Bornstein, How to

Change the World: Social Entrepreneurs and the Power of New Ideas (New

York: Oxford University Press, 2007) traces Drayton's history and profHes

Ashoka's "change makers� in depth,

230 A big obstacle to reaching such customers: For a well-grounded,

skeptical take on what multinationals can and cannot do at the bottom of the

pyramid, see Ashish Karamchandani, Mike Kubzansky, and Nishant Lalwani,

�Is the Bottom of the Pyramid Really for You?" Harvard Business Review,

March-April 2011,

233 Dan Pink: For a brilliant cartoon rendering of Pink's ideas, see this video

produced by the RSA: www.youtube.comlwatch?v=u6XAPnuFJJc. Also, for

more on using purpose as a motivator for social good, check out Purpose, a

nonprofit started by Jeremy Helmans and David Madden, Heimans makes the

case for the "movement entrepreneUf� here:

http://ldeas,economlst.comlpresentationlmovement-entrepreneUf,

235 Brian Trelstad: On Trelstad's concerns about metrics, see "Simple

Measures for Social Enterprise," ImlOvatiolls, Summer 2008,

238 a concept known as microfinance: On the debate among economists on

the true Impact of mlcrofinance and the Importance of randomized control

trials, see Dean Karian, More than Good Intentions: How a New Economics Is

Helping to Solve Global Poverty (New York: Dutton, 2011) and the feisty

panel discussion �Promise and Peril of Mlcrofinance Impact Evaluations"

during the Microfinance USA Conference, New York, May 23-24, 2011:

www,mlcrofinanceusaeonferencc,org/vldcos-20 II/sesslon-O I-promlse-and­

perlLphp, On related topics, also see AbhlJit Banerjee and Esther Duflo, Poor

Economics: A Radical Rethinking of the Way to Fight Global Poverty (New

York: Public Affairs, 2011), A pointer to recent economic studies on the Impact

of microfinance Is "Microflnance's Elusive Quest: Finding an Accurate

Measure of Social Impact,H Knowledge@Wharton,

http://knowledge ,wharton, u penn ,edularticie,cfm ?artlcieid =2 391 ,

241 The profit motive: For a lively debate on this matter, see Matthew

Bishop's video encounter with Felix Salmon, complete with color commentary

by the thoughtful David Roodman:

http://blogs.cgdev . org/open_book/20 1I/02/felix -salmon-and-matthew-bishop­

head-to-head.php. All three have excellent blogs that are worth a look.

243 companies must put society's great needs front and center: On the

question of whether taking the long view will really lead businesses to solve

big social problems profitably, see this Intriguing paper: Daniel Altman and

Jonathan Berman, �The Single Bottom Line," June 13, 2011,

http://dalberg.comlsltesldalberg.comlflleslsblflnal.pdf.

Conclusion: We Are All Innovators Now

252 what has been called frontier economics: The arguments about frontier

economics are put forth well In Brink Lindsey, " Frontier Economics: Why

Entrepreneurial Capitalism Is Needed Now More than Ever,� Kauffman

Foundation Research Seties on Dynamics of Economic Growth, April 2011,

www.kauffman.orgluploadedFileslfrontiececonomlcs_4_06.pdf.

253 Jack Hidary: For more on Jack Hidary's role and vision for electric cars

and tide-sharing, see www.youtube.com/watch?v=RmOLlfNjpQ.

255 most promising are advanced software. Big Data: On the transformative

power of Big Data, see "Big Data: The Next Frontier for Innovation,

Competition, and Productivity," McKlnsey's Global Institute, May 2011,

www.mcklnsey.comlmgl/publicationslbi�data/lndex.asp. Also see some very

cool data visualizations. as well as discussions about the future of Big Data, at

an Ideas Economy event In June 2011 (on www.fora.tv for a fee, free snippets

at http://ideas.economlst.com/vldeo/power -big-data) .

255 Apple's first mouse: A typically Gladwellian take on the development of

the computer mouse by Xerox PARC, IDEO. and others Is found In Malcolm

Gladwell. �Creatlon Myth: Xerox PARC, Apple, and the Truth About

Innovation," New Yorker, May 16, 2011,

www.newyorker.com/reportlngl20 11/05/16/1 1 05 I 6fa_fact...gladwell.

255 The traditional uncompromising focus: Design thinking has failed to

achieve Its promise and It Is time to move onto the next management fashion,

argues Bruce Nussbaum, one of design thinklng's greatest proponents over the

past decade, In �Deslgn Thinking Is a Failed Experiment. So What's Next?'"

Fast Company's Co. Design, www.fastcodeslgn.comlI663558/deslgn-thinklng­

is-a-failed-expetiment-so-whats-next. For more on the tension between Six

Sigma and design thinking, see Tim Brown, "Six Sigma and Design Thinking,"

Design Thinking: Thoughts by Tim Brown, September 10, 2009,

http://deslgnthlnklng.ldeo,comf?p=387, and a related article by Sara Beckman,

�Welcomlng the Old, Improving the New," New York Times, September 5,

2009, www.nytlmes.com/2009/09/06Ibuslnessl06proto.html? _r= I ,

256 The key is to focus on the needs of people: The nifty Embrace concept

and product are explained at the Embrace website, http://embraceglobal,org,

and on the website of the Stanford University Institute of Design,

http://extreme,stanford,edulproJectslembrace,htmL

257 everyone can join the �maker revolution": See Chris Anderson's fine

cover stoties on the topic In Wired (for example "In the Next Industtial

Revolution, Atoms Are the New Blts,H Wired, February 2010,

www.wired.com/magazlne/2010/01/fLnewrevolution/aI1ll). and his Interview

with Carl Bass In June 2011, www.youtube.com/watch?v=yXBGNgg03hL

257 And what about talent: The WEFI BCG report on global talent mobility,

published In March 2010, can be found here

(www,weforum,orglreports/stlmulatlng-economles-through-fostering-talent­

mobillty?fo= I),

258 Companies will also have to redouble efforts: Pepsi has a stellar record

In employing the disabled, which Is worth further study and emulation, The

Council on Competitiveness has done studies showing that It Is older

entrepreneurs, not two college dropouts working out of a garage, that are

responsible for many of the start-ups In America, The group argues for

rethinking the opportunities made available to older workers, See also Sylvia

Ann Hewlett et ai., "The Battle for Female Talent In Emerging Markets,"

Center for Work-Life Policy, 2010,

Index

The pagination of this electronic edition does not match the edition from which

it was created. To locate a specific passage, please use your ebook reader's

search tools.

Achatz, Reinhold. 205, 207-8

Acumen Fund. 223-25, 229, 232, 235

Advantage (Segal) . 169

Africa. 37, 92, 182, 189, 232, 248

Ahlstrand. Christina. 216-17

Ahold. 180

Air Products, 112

Alcatel-Lucent, 200

Allen. Paul, 126

Amadeus Capital, 180

Amazon. 34. liB , 121

antibiotics, 38-45

AOL, 34

Apperl, Nicolas. 127-28

Apple, 9, 144-45, 255, 279n 255

Aravind. 57

artificial Intelligence, 92, 94, 96-98, 99, 100

Ashoka. 226-28

Aspen Institute, 164

AT& Ts Bell Labs, S, 113, 114, 192, 199, 200

Autodesk, 257

automotive Industry, 61, 67, 119, 197-98, 206. 253; clean energy technologies.

198, 214, 253-54; Progressive Automotive X Prize, 126, 198; smart

systems and, 204-5

aviation industry, 128-29

BASF, IIO

Bass, Carl. 257

Baumol, William, 28, 266n 28

bees, 140

Behar, Yves, 23-24

Bernanke, Ben. 84. 88, 268n 84

Bessemer Venture Partners, 275n 200

Better Capitalism (Utan) , 186-87

Big Data. 82. 196-97, 255, 276n 203, 278n 255

Bigelow. Robert, 132

Billions of Entrepreneurs (Khanna), 58

Bingham, Alpheus, 3. 123

Bloeon, 60

Bishop, Matthew, 228-29, 237-38, 240

Black Swan, The (Taleb) , 145

black swans, 35

Bloom, Barry, 43

Blue Sweater, The (Novogratz) , 223

BMW, 204. 205, 276n 204

Booz & Company, 113-14

Boston Consulting Group (BCG), 125. 258, 272n 166

Brabeck-Letmathe. Peter. 244

Brand, Steward, 155-60

Branson, Richard, 130

Braun, Robert, 133

Brazil, 11 , 61-62

BRIC. 13,26

Brilliant. Larry, 30, 142. 147, 266n 30

Brln, Sergey, 188. 269n 96

British Petroleum (BP), 126, 136. 141, 142. 181

Brookings Institution, 186

Brown, John Seely, 56, 57, 266n 56

Brown. Tim. 255

Brownstein, John. 48

Brunt, Llam. 129

business models, 54-55, 57; China and, 56, 57, 59; disruptive, 58-59, 178-79,

189, 208, 210, 251: frugal engineering and, 54-59; hybrid, 57, 226, 230,

232-37. 246; Kaiser Permanente, 215-18; localized modularlzatlon. 56, 59,

266n 56

Cambtidge, England, 176. 180

Canada, 194, 274n 194

capitalism. 15-17, 29-30, 221-22, 244; creative, 246-48; creative destruction,

16, 177. 187, 190, 197: hybrid models and, 232-37; natural capital and,

219, 277n 219; profit motive, 16, 234. 241. 278n 241; purpose and, 17. 25,

226, 233-34, 262; shared value, 242-46: socially aware, 218-48, 251, 277n

220. See also philanthrocapltalists

Cargill, 61

Carlson, Curt, 183

Center for Disease Dynamics, Economics and Policy, 42

Center for Global Development, 40. 104

Centers for Medicare and Medicaid SelVlces (CMS). 67

Chesbrough. Henry. 108, 112, 113, 201, 274n 186

Chicago, 133; snowstorm (2010), 151

Chile, 147-48

China, 10, 11 . 25, 26, 30. 46, 48, 61, 63, 80. 84, 145. 169, 205, 209, 210;

bamboo capitaliSts, 58, 182; better business models and, 56, 57: Fortune

500 list and. 61 : frugal Innovation and. 51 , 56-58. 59, 65, 171, 266n 56;

government policy and Innovation. 164, 171-73. 182, 273n 171: Innovation

and zero-sum fallacy. 16. 163-74, 272n 166: med-tech sector. 63-66;

patents, 170

Chongqlng. China, 56

Chopra, Aneesh, 193, 274n 186

Christensen, Clayton M., 8-11, 116. 168, 178-79. 208, 217. 259, 275n 195

Cisco. 149

citizen sector, 226-28, 230, 234, 236

CIVETS, 13

climate change, 13, 22. 26. 30, 74, 92, 141. 142, 143. 148, 149. 157, 159

Clinton. Bm, 226-27

Clorox, 112

Cloyd, Gil, 207

Club of Rome, lOS, 155, 156, 159

Compaq. 34

Compartamos. 238, 240

computers/computer technology, 94. 95, 100, 106, 210-12; Intel Corporation

and, 212-13. See also artlflcial intelligence

Cook, Scott, 201-2

corporate social responsibility (CSR). 242-46, 278n 243

corporations, 17, 68, 196-218; accelerating Innovation and, 207-8; Big Data

and, 82. 196 97. 255, 276n 203, 278n 255; closed Innovation, silos. and,

122-23; frugal innovation and, 62-66, 197; health care Industry. 214-18; as

information businesses, 62. 196-97: Institutionalized trust and, 222;

knowledge turns. 197; legacy systems. 54-56: multinationals, 13, 24. 33,

53, 58, 61-65, 68. 109, 144. 196, 277n 230: New Economy disruption, 200,

202: open Innovation and, 108-20; R&D, 108-9. 113-14. 123. 176, 199-

202, 273n 184: resilience, 150-58. 260-61; reverse Innovation, 196. 208-

I I , 218: smart systems and, 202-4; social agenda, 220, 229-30, 242-46,

278n 243: survival of, 196-218, 261, 275n 200

Council on Competitiveness, 184, 185, 273n 184. 279n 258

Cowen, Tyler, 75-77. 78-79, 80, 81, 82, 83, 86

crowdfundlng. 254

crowdsourclng. 107, 108. 114-24

Cubist, 44

Dahlander. Linus, 122

Darwin, Charles, 104

de Jong, Ronald. 65

Democratizing Innovation (von Hippe!) , 116

Denby. Jeff, 22-25, 252, 265n 22

design thinking, 255-57, 279n 255

DHL, 153-54

Diamandis, Peter, 102. 126, 129. 206, 270n 128

Dlce.com, 253

Digg, 121

Digital (DEC), 9, 187. 210, 211

Dillman, Linda, 207

Direct Line, 175

Discern Analytlcs, lOS

Doerr, John, 237-38

Doriot, Georges, 175

Dorsey, Jack, 274n 186

Drake, Edwin, S

Drayton, Bill, 226-28, 230, 244

Drive (pInk) , 233

Drucker, Peter, 174. 175, 234, 237, 259-60

Dryden, John, 6

Duncan, David, 125

EarthWeb, 253

eBay, 118, 205

Edison, Thomas, 134

Ehrlich, Paul, 92, 104, 105, ISS

Eli Lilly, 2, 44

Eliot, T. 5" 129

Embrace, 256, 279n 256

energy, 27, 119, 191, 212, 213, 214; carbon tax, 193; car Industries and, 197-

98, 253-54; clean energy, 16, 33, 34, 102, 253-54; nuclear power, 157-58;

public policy and, 29, 191; shale gas Industry, 191

Enriquez, Juan, 98-99, 269n 98

Enron, 222

Enthoven, Alain, 218

entrepreneurs, 27-29, 58, 182, 252, 266n 28: Asian, 176, 209; bankruptcy code

and, 182, 192: European, 176, 177-79, 180: Immigrants and, 185;

Innovative, 177-79, 186, 220, 247, 251, 252, 274n 186;

mlcromultlnatlollals, 186, 252: overregulation and, 181-82;

philanthrocapltalists and, 225; U,S" 176, 177-78, 182, See also social

entrepreneurs

environment and ecology, 6, 12, 13, 22, 26-28, 30: agriculture, 156: climate

change, 13, 22, 26, 30, 39, 141, 142, 149, 159; �eco-taxatlon� reforms, 244,

245: externalities and, 243-44, 245; water-energy-cllmate nexus, 27; water

scarcity, 27, 30, 100-101, 149, 209

Europe, 78, 79-80, 83, 137; entrepreneurship In, 176, 177-79, 180;

government and Innovation, 174-79; health care system, 215: higher

education spending, 178; icelandic-volcano, 136, 144, 153-54: Innovation

clusters. 175, 176. 179-81: R&D investment, 179, 181; venture capital and,

179

Evans, Harold, 188-89

evolution. 98-100, 103-6

Extraordinary Popular Deillsions and the Madness of Crowds (MacKay). 120

ExxonMobil, 213

Facebook, 76, 117. 119, 202

fast failure. 6, IS, 200, 275n 200

Feachem, Richard, 215. 216

Field, Alexander. 82

Finland. 32, 181

Fishman. Mark, 43

Fleming. Alexander, 39

food, 27, 29, 92-93, 127-30: chickens and pandemics, 37: colony collapse

disorder and, 140; genetic modlflcation, 101. 156, 272n 156: technology

and production, 93, 101

Ford, Henry. 134, 245

Fortune 500 list, 61

Foursquare. 82

France. 180, 190-91, 214-15, 274n 190

Ftiedman, Milton. 242, 243

Ftiedman, Thomas, 165

frontier economics, 252, 278n 252

FrontlineSMS, 50

frugal Innovation, 13, 51-68, 171. 261: Asia and China, 62-66: better business

models, 53-59: generic!biosimilar drugs, 59-61: medical technology, 52-

54, 63-66' obstacles for U.S. and, 66-68

Gann, David, 122

Gates. Bill, 32-33, 82-83. lOS, 184. 200

Gates Foundation, 32, 33, 126-27, 131-34. 224, 229

Gelernter. David. 202-3, 276n 202

General Electtic (GE), 65, 67. 68. 123, 171. 177, 200. 202, 221. 254, 256. 272n

166

General Motors (GM). 117, 144. 211

OnStar, 117

genomics, synthetic , 92, 93, 98-100

Germany, 180, 205

Giving (Clinton) , 226

GlaxoSmithKline, 43, 134

Global Business Network (GBN), 149

Global Catastrophic Risks (possner), 146

global financial crisis, 72, 77, 87-88, 136, 141, 143

globalization: circle of empathy and, 138; paradox of, 142-43: speed of

Innovation and, 192; wealth disparity and, 143; wicked problems and. 142;

of world economy, 2, 6, 11 , 24-25, 58, 69. 144-46, 199

Global Viral Forecasting Initiative. 47

Good Capitalism, Bad Capitalism (Lltan) . 186

Google, 34, 48-49. 81-82, 86, lO2. l lO-ll. 119. 202; Googleplex, 96, 197,

269n 96; philanthropic divisIon, 30. 229; Wenda, 209

Goossens, Herman, 40-41

government policy and Innovation. 16, 29, 30, 32, 46. 163-95: Apollo moon

shot fallacy, 163, 165-66, 173-74: AsIa, China, and, 171-74. 273n 171;

"eco-taxatlon" refonns, 244, 245; Europe and. 174-79, 180; immigration,

70, 183-85, 187, 194; IndustrIal policy, 163, 178, 183-84, 211;

Interventionist approaches, 173-74; Japan and, 168; least as best. 188, 192,

195, 275n 195; mistakes In, 194; national Innovation policies, 190-95;

recommendations, 181-87, 192-95; risk and, 148, 152-53: stifling of

Innovation, 180-82; top-down approach, 166; wIcked problems and, 254

Government 2.0, 193-94

GOVIndaraJan, ViJay. 208, 209. 244-45

Grameen Bank, 239, 240

Great Depression, 82

Great Disruption, 69-70. 88. 200

Great Leap Fonvard, A (FIeld) , 82

Great Stagnation, The (Cowen), 75

Green, Michael, 228-29, 237-38

Greenspan, Alan. 72, 267n 72

Groupon, 76, 81

Grove, Andy. 211-14, 276n 211

Gullans, Steve, 99

Hacker, Jacob, 74

Hagel, John, 57. 266n 56

Haiti, 136, 141, 147-48, 152

Halkett, Richard, 135

Halvorson, George, 216-17

Hamel. Gary, 54

Hanson. Robin, 146

Haour, Georges. 180

Harley-Davidson, 144

Harrison, John, 127

Haskins, Ronald, 72. 267n 71

Hastings, Reed, 133

Hauser, Hermann. 180

health, 6, 12, 21-22; advances, 48, 101, 138-39; antibiotic development, 42-

45; antibiotic resistant bacteria, 38-42, 43; Aravind. 57-58; bottom-up

Innovation and. 46; Britain's NHS, 216, 218: as dinosaur industry. 212;

disruptive innovation and, 214; electronic records, 193, 214, 215, 275n 194.

276n 215; Embrace, 256; European system. 215: frugal Innovation, 52-54,

63-66, 267n 63: Gates Foundation. 131-32; generic and bioslmilar drugs,

59-61: globalization and, 21. 37: health care Inflation, 74-75, 80-81, 267n

74: Intellectual Ventures project, 33; Kaiser Permanente, 214-18, 276n

215: "lab on a chip," 49; misaligned Incentives, 16, 45-47: open Innovation

and, 118-19: pandemics, 13, 21-22, 36-38, 47-50, 266n 36: smart systems

and, 203-4; U.s. system, 215-18, 242

Herbert. Andrew, 124

Hertz, 254

Hewlett-Packard. 149, 187

Hldary, Jack, 253-54

Homer, Peter, 133

"Homo Evolutls" (Enriquez and Gullans) . 99

Honda. 168

Horn, Paul. 111

Howe, Jeff, 114

Huawel, 61

Huffington, AIianna. 70-71

Huston, Larry. 109-10, I I I

IBM, 9, 10,48, 94. 149, 177. 197: Innovation and, 111-12. 122, 125. 210-11

Ideas Economy, 1-17. 25-31, 219, 249, 255: reality check, 7-8

IDEO, 255

Immelt. Jeffrey, 68, 123, 171, 200, 214, 246, 256, 272n 166

immigration policy, 70, 73, 77, 163, 183, 184-85, 187, 194

immortality, 93-94

incentive ptizes, 2, 107, 108, 126-34, 254; for drug development, 131-34;

effectiveness of, 129-32; Gates Foundation, 126-27, 131-32; govemment­

sponsored, 129, 131-34, 193: history of, 127-29: Netfllx and, 131, 133;

problems with. 123-24, 132-34. See also InnoCentive; X Prize Foundation

India, I I , 30, 41, 227-28: Aravind, 57-58, 267n 57: "demographic dividend"

in, 84; disruptive business models and, 210: Drishtee. 223. 232: economic

gains of. 26. 272n 166; engineering education In, 169-70; frugal innovation

and, 51-54, 57-58: generlc!blosimilar drugs, 54, 59-61; government and

innovation, 164, 168; Innovation clusters, 195: Licence Raj, 182, 228;

LlfeSprlng, 223; MFls and, 238-39; mobile telephony and, 209;

outsourcing and, 57; Silicon Valley and, 34-35; social entrepreneurs In,

230: software Innovators. 59; Unilever's Shakti division. 209: VlslonSprlng

in, 232

industrial revolution, 79, 227

information technology. 58, 78-79, 192. 204-5, 207-8

Infosys, 59, 170

InnoCentive, 2-3, 14, l10, 123, 130, 131

innovation, 4-5, 29: accelerating. 98, 124. 199, 207-8, 214: analogy of a

kitchen, 85; bottom-up, 14, 22. 36, 46, 47, 166, 190, 191, 261;

democratization, 1-4. 5, 6, I I , 14. 106, 107-35, 199. 204-5, 249. 257-58,

261, 262; design thinking, 255-57. 279n 255; disruptive. 9, 10, I I , 12, 91,

93, 107, 110. 116-17, 163, 168. 178-79, 197, 202. 208, 252, 259 (see also

business model) : economic growth and, 6, 84-86; established companies

and, 196-218: evolutionary basis for. 103-6; failure and, 6, 7, 15, 33-34,

198, 200, 261, 275n 200; frugal engineering. 51-68; global competitiveness

and, 4, 163-74: gold-plating and. 9. 10, 55. 81, 107, 116-17, 150, 208;

government policy and, 163-95; "intangible" capital. 84. 88, 255;

manifesto, 8, 252: new economics of. 70. 73, 84-86: as. non-linear, 105-6,

253: R&D and. 5, 108-9, 123, 172, 176, 178, 199-202; risk and, 6, 14. 15,

136-60. 198; ruJes for. 86-87. 260-62; sustaining technologies, 8-9. 107;

talent and. 279n 257; top-down approach, 166, 191-92; venture capital and,

33-35, 176, 179, 192. 275n 200: wicked problems and. 12-13, 30-31, 91-

107, 136-60, 219-48. 249: widely held views of. 7-8, 16: zero-sum fallacy,

4. 16, 166, 260. See also entrepreneurs; open innovation: reverse Innovation

Innovation Nation (Kao) , 183

Innovator's Dilemma, The (Christensen), 8-9

Innovator's Solution, The (Christensen and Raynor) , 10

Institute of Large Scale Innovation, 32

Intangible capital, 84, 88, 255

Intel, 164, 171, 211, 212-13

Intellectual property, 123, 170, 171

Intellectual Ventures. 33-34, 266n 33

International Harvester, 130

Internet, 2, 10, 34. 50, 76, 95, 97, 178; Bill Gates on, 105; commerce. 120;

Cowen's criticism, 76-77. 78, 81-82: crisis planning and, 151;

crowdsourclng and, lIS, 117-22: customer data and. 196-97;

democratization of, lIS, 120, 193: disease detection and. 48, 50; economic

rules for. 86: Japan and, 123; leapfrogging of, 103; as long-term

Investment, 82-83; "mlcromultlnatlonals,� 186; mobile telephone access,

209: open Innovation and, 1 19-20: as transformatlve, 13-14, 22

Intuit, 201-2, 276n 201

Isenberg. Daniel, 186, 274n 186

Ishrak, Omar. 67, 68

Israel, 195

ITC. 232

Jackley, Jessica, 246-48, 252

jamming (Kao), 31

Japan. 10-11. 59, 166-68: earthquake and tsunami, 136, 144, 158; economic

stagnation. 167, 168; government policy and innovation, 168, 176, 180-81;

patents and, 179

Jaruzelskl, Barry, 1 13-14

Java, 34

Jawall, Vivek, 52-53

jeopardy! (TV show), 94, 106

Jobs, Steve. 184

Joy, Bill. 96. 113

Jung. Edward, 33-34. 266n 33

Kaiser Permanente. 214-18, 276n 215

Kalil, Thomas, 132-33. 271n 132

Kao, John, 31-32. 183

Kasparov, Garry. 94

Kassalow, Jordan. 230-32

Kauffman Foundation, 177. 186, 273n 184

Kelly, John, 94

Kelly, Kevin, 95, 97-98

Kembel. George, 256

Kennedy, John F., 165, 183

Kenny, Charles, 104

Khanna, Tarun. 58

Khosla, VinD<l, 34-35, 197-98, 239, 240

Khosla Ventures, 33

Kibbey, Jason, 23

Kimberly-Clark, l 1 2

Kiva. 118, 246-47, 248

Kleiner Perkins, 34

"knowledge turns," 197, 214

Kodak. 9, 10

Koonin. Steven, 181

Korea, 100

Kortum, Samuel, 176, 177

Kramer. Mike, 242

Kuhn, Thomas. 248

Kundra, Vivek, 151, 269n 94

Kurzweil, Ray, 93-97. 99. 101-2

Lafley, A. G., 109, 125, 210

Lakhani, Katim, 130-31

Lanier, Jaron. 121

Laxminarayan, Ramanan, 42, 45

leapfrogging, 54-56, 61-62, 87, 102, 154, 182, 208

Lee, Rachel, 65

Lego Mindstorms, 116

Lehman Brothers, 29, 222

Leonard, Herman. 144-45, 150-52

Lepu Medical. 64

Lerner. Josh, 176, 177

Leung, Gabriel. 36-37

Lewis, Kim, 43, 44

Li. Simon, 63, 64

Li & Fung, 59

Libya. 138

Lindbergh. Charles, 128-29, 270n 128

Linux, 107, 111 , 234

Litan, Robert, 186-87. 273n 184

Litlle, Mark. 123

Local Motors. 119

Longxin. 56

Los Alamos National Laboratory, 110

Lyons, Richard, 234-35, 237

Maathai, Wangari, 24

MacKay. Charles, 120

Afacrowikinomics (Tapscott and Williams), 120

Maddison, Angus, 79-80, 268n 79

Mandelbaum, Michael. 165

manufacturing sector, 4, 11 , 24, 59. 189. 272n 166: globalization and

disruption, 144-46: localized modularlzation, 56, 59: "maker revolution,"

257, 279n 257

Marillion. 118

Martin. Roger, 222

Massachusetts Institute of Technology, Media Lab, 48, 116

materials science. 92

Mayo Clinic, 218

McDonald's, 4-5, 57. 201

McKinsey. 129, 203

McKinsey Global Institute (MGI), 80-81, 268n 77, 279n 255

Medtronic. 53-54, 62-63, 67, 68

Mekong River Commission, 146-47

Merck & Co, 44-45, 66. 132

meta-innovation, 14, 163,248

Mexico. 152-53

microflnance Institutions (MFls), 238-41, 246-48, 278n 238. 278n 241

micromultinationals, 186, 252

Mlcroport. 64

Microsoft. 124. 126

middle class: elites vs., 72, 74. 75: global, 12. 26, 51. 262: squeeze, 71-75, 77,

88, 262. 267n 71

Middle East. 83-84

Mllanovic. Branko, 72-73

Mindray Medical, 64

Mirror Worlds (Gelernter) . 202-3

mobile telephony. 50: Aftica. 182. 189: China. 205. 209; crowdsourcing and.

115: Europe. 175. 194; Internet access and, 209; transformatlve power. 13-

14.22. 76.69. 267n 69

Moore's law, 95

Morse. Kenneth, 122

Musk, Elon. 188, 205-6, 252. 274n 186

Myers. Andrew. 44

Myhrvold. Nathan, 266n 33

Napoleon, 127

NASA, 132. 133, 205

National Endowment for Science. Technology, and the Arts, 135

Netflix. 131. 133. 202

Newell. Richard. 191, 274n 191

Newmark. Craig, 193-94

New Rules for a New Economy (Kelly). 95

Newsweek. 164

Newton, Sir Isaac. 127

New York City. 154

New Yorke/� The. 79

Nightingale, Florence, 227

Nobel Prize, 129

Nokia, 115. 181, 209

Nooyi. Indra K., 27, 244

Nordhaus, William. 100

Normal Accidellls (perrow). 145

Novartls, 43, 118-19

Novogratz, Jacqueline, 222-25

nuclear science, 103

Obama. Barack. 71-72, 75, 132. 214-15, 267n 71

Oceania. 24

Omidyar. Pierre, 229. 238, 240

One Laptop per Child, 24

Only {he Paranoid Sllrvive (Grove). 212

Open Business Models (Chesbrough) , 108

open Innovation, 1-4, 5, 6, I I , 14, 106, 107-35, 194, 261; Booz analysIs of

R&D, 113-14; cognitive surplus and, 119-20, 121; corporations embracing,

108-20; crowdsourclng, 107, 108, 114-24; godfather, 108: IBM and, 111-

12, 125: Ideas "not Invented here,� 134-35: Incentive prizes. 2, 107, 108,

123-24. 126-34; Intellectual property tights and, 123; Intuit and, 201-2;

P&G and. 108-11, 125; patents and, 124: pitfalls, 121-22: skeptics and

criticism, 122-24; talent and, 257-59

Open Innovation (Chesbrough) . 108

Open Services !Jmovation (Chesbrough), 108

Organization for Economic Cooperation and Development (OECD). 6, 77. 100,

172, 254-55, 268n 80, 274n 194

Ortelg. Raymond, 128

Ouderkirk. Andrew, 207

Our Final HOllr (Rees) , 140

PACT, 23-25

Page. Lany, 197-98. 269n 96

Painter, Scott, 274n 186

Pakistan. 141

pandemic diseases, 13, 21, 22,30

Parekh, Rajesh. 65

patents, 124. 130, 170. 176-77, 179. 266n33

Payne, David, 43

PayPal, 205, 252

PepsiCo, 279n 258

Perrow, Charles, 145

Pfizer, 60, 132

pharmaceutical Industry: antibiotic development and. 43-44: diagnostics, 46;

generic and bioslmllar drugs, 59-61: "knowledge turns" and, 214;

misaligned Incentives. 45-47; regulatory gap and. 209

Philamhrocapitalism (Bishop and Green) . 237-38, 240

phllanthroeapltalists. 17. 222-29, 251; metrles and, 223-24. 232-37: MFis and,

238-41; profit motive, 238-41

Philips, 53, 64-65, 67

Pierson. Paul, 74

Pink, Dan, 233, 234, 277n 233

Pinker, Steven, 138

Polaroid. 9

Pomerantz, Roger, 44-45

Population Bomb, The (Ehrlich) , ISS

Porter, Michael E., 113, 242

Posner. Richard, 146

posllndustrlal revolullon. 4, 8, 101. 119

Prahalad, C. K., 54-55, 115-16. 267n 57

Procter & Gamble (P&G), 108-11. 177; life cycle of consumer goods and, 207;

open Innovation, 109-111 . 125; reverse Innovation and, 210; social

entrepreneurs and, 230

ProFounder, 247-48

Quora, 117-18

Ramadorai, 5., 59

Rational Optimist, The (Ridley) , 104

Ratlner, Justin, 171

Raymond, Lee, 213

Reddy, Srlnath, 41

Redefining Health Care (porter and Telsberg) , 242

Rees, Martin, 139-40, 146, 271n 139

Reich. Robert, 74

Reinert, Bill, 123

resource scarcity, 13, 26, 92

retail sector. 9-10. 22-25, 144, 203, 206-7

reverse Innovation, 196, 208-11 , 218, 276n 208

Ridley, Mati, 92-93, 104

Rio Tlnto, 61

Rising Above the Gathering Storm (report) , 164-65

risk, 6, 14, 15, 136-60. 198, 271n 143; cost of catastrophe, 141-42, 152-53;

decentralization, crisis planning, and resilience, 150-58. 260-61; failure

and, 6, 7, 15, 33-34, 198, 261; financial catastrophe, 136, 141, 143;

globalization and, 142-46; government policy and. 148, 152-53; natural

disasters, 136, 139-42, 147-48; planetary destruction, 139-40, 271n 139;

prevention, prediction, and preparation for, 146-50; Steward Brand and,

155-60; systemic, 142-43; violence and, 138; world economy and, 137,

144-46

Rockefeller Foundation, 50, 149, 154

Rodin, Judith, 154

Romer. Paul. 85-86, 87

Rose, Trevor. 1-4, 14

Roublnl, Nourlel. 141

Saffo, Paul, 105-6. 279n 105

Sakkab, Nabil, 109-10, I I I

Salesforce.com. 211

Salzburg Global Seminar, 174-75

Sarkozy, Nicholas, 214-15

Savander, Nlklas, l iS

Saxenlan, AnnaLee. 188, 274n 188

Say, Jean-Baptiste. 175

Schramm, Carl, 177

Schumpeter, Joseph, 16, 174, 175, 190,252

Segal, Adam, 169, 182

Seico, 58

Shlrky. Clay, 119. 121

Siemens. 205, 207

Silicon Valley, 59, 91, 94, 96. 123, 168, 183, 199, 266n 33: Boston's Route

128 vs., 187-88, 274n 188; European emulation, 175-76, 179-81;

Immigrants and, 34-35, 185, 195' secret of, 187-89, 192, 195

Simmons. David, 60

Simon, Julian, 92

Singapore, 11 . 147, 174. 175, 176. 180

Singh. Shlvlnder, 53

singularity, 14-15, 93-98. 105

Singularity Is Near, The (Kurzweil) , 93

Singularity University, 102

Sirkin, Hal, 125

Skoll, Jeff. 30. 229

Skoll Global Threats Fund, 30, 142

SKS Mlcroflnance, 238,239

Skype, 175-76

Slaughter, Louise. 39

Slovls, Jennifer, 216-17

smart systems (Intelligent Infrastructure) , 148-50, 192. 202-4, 275n 194

Smith, Adam, 104

social entrepreneurs, 17, 28. 31-36, 218, 219-48; Denby, Behar, and PACT,

22-25, 252; Drayton and Ashoka. 226-28. 244; Embrace. 256: Jackley and

KlvalProFounder, 246-48, 252; Kassalow and VlslonSprlng, 230-32;

Novogratz and Acumen Fund, 222-25: P&G and, 230

social networking. 1 1 . 48-49, 50, 76, 117. 119-20, 155

Solow, Robert. 84-85

Sony, 144

South Korea. 164, 174. 180-81

Soviet Union, 165, 178

space travel, 102, 103, 130, 205-6

SpaceK 188, 205-6. 252

Stanford Research Institute, 183

Stanford University. blodeslgn laboratory, 53-54

Stavlns, Robert. 245

Steiner, Achlm, 140

Sun Mlcrosystems, 34, 96, 113

SuperFreakof1omics, 33

Surowleckl, James. 120

Swatch, 24

Swiss Re, 141, 152-53

Taiwan, 10. 59. 195

TaKaDu. 149

Taleb. Nasslm, 145-46, 154

talent. 257-59, 279n 257

Tanzania, 223

Tapscott. Donald, 120

Tata, Ratan, 126

Tata Consultancy Services (TCS). 59

Tata Group, 61, 126

technology, 9-10, 27-28. 35. 91-107, 199; disruptive, 10-1 1 , 9 1 , 93: economic

growth and, 81-82, 84-86. 106: economic stagnation and. 76-77; Improved

standard of living and, 76, 83, 101, 104, 106, 137-39; "Internet of things,"

203: postblologlcal future, 92: rules for, 86-87, 88; techno-optimists. 12,

92-93, 94, 103; techno-pessimism, 82-83, 105: techno-spiritualists, 97;

unintended dangers, 97; wicked problems and. 91-107. See also artificial

intelligence: computers and computer technology

Tech Shop. 257

Tedlow, Richard, 212

Telsberg, Elizabeth Olmsted, 242

telecommunications equipment. 61

terrorism, 29, 30, 97, 140

Tesla Motors, 123, 188, 206, 252

Tetraphase, 44

Thailand, 48

Theravance, 43-44

They Made America (Evans) , 188

Third World America (Huftlngton) , 71

3 M, 202, 207

Time magazine, !l3-!l4

Toyota, 123, 144, 198

tragedy of the commons, 21-22, 42, 47; phannaceutical lndustry and, 45-47

Transcendent Man (film), 96

Transparency International, 237

Trauson,64

Trelstad, Brian, 235

24/7 connectivity, 1 1 , 25, 120, 144

2030 Water Resources Group, 100, 269n 100

Unlcharm Corporations, 110

Unilever, 125, 209, 232

United Nations, 134; Environment Programme, 140; Foundation, 50

United States: aging population, 77-78; backlash In, 70, 73; carbon tax, 193;

China as threat. 166, 169-74, 272n 166: economic inequity, 70, 72, 73;

economic stagnation, 71 , 75-79, 80, 82-83, 268n 77; economy, 4, 80-81,

84-86, 174; education, 81, 170, 163, 183, 184, 187, 189, 258-59, 262;

emerging economies as threat, 13; entrepreneurship, 10, 176-78, 182, 252-

53; financial ctisls, 87-88, 143, 268n 87: frugal innovation, 63-67;

government policy and Innovation, 163, 178, 183-95: health care, 74-75,

80, 215-18, 242, 268n 80; immigration, 77, 163, 183-85, 187: Improved

standard of living, 137; Industrial policy, 148, 190, 211 : industtial

revolution, 80; infrastructure/smart systems, 71, 154, 163, 183, 184, 192,

275n 194; Innovative leadership and recommendations, 4, 163-74, 87, 88,

183-87, 192-95, 273n 184; innovator's dilemma and, 10; intellectual

property rights, 186, 187: Japan's economic rise and, 166-67; middle class,

71-75, 77, 88, 262, 267n 71 ; new Sputnik movement. 163, 165, 169, 183;

productivity In, 78, 82, 83: R&D investment. 172, 178. 184, 199. 273n 184;

savlngs-and-loan crisis. 167: tax Incentives for innovation, 184, 185-86,

187, 194

University of California. Berkeley, 108, 185

urbanization, 12, 25-26, 91, 142, 156-57

Ushahidi, 50, 152

Vandebroek. Sophie. 112

Varian. Hal. 86

venture capital. 33-35, 176. 179, 192. 223-25, 275n 200

Victorian age. 86. 105, 188. 268n 86

Vietnam. 153

Vlnge, Vernor, 95

Viral Storm, The (Wolfe), 38

Virgin Galactic, 130

von Hippel. Eric, 116. 117

Wadhwa, Vlvek, 169-70. 185, 273n 169

Wall Street (film). 220-21

Walmart, 10, 144, 203, 206-7

Walton, Sam. 206

Wang, 9. 187, 210. 211

Wasden, Christopher, 267n 63

Welgao, 62-63

Weinmann, Ulrich. 204

Welch, Jack. 220-22, 277n 220

West, Geoffrey, 26, 96, 265n 26

Wharton Business School. 202

Whole Earth Catalog, The (Brand), 155. 160

wicked (global) problems, 13, 21-50, 91-93, 260. 265n 16: antibiotic

development. 42-45: antibiotic resistant bacteria, 38-42; capitalist

solutions, 25-31, 219-48; global commons investing. 31-36: government

policy, and. 254; misaligned Incentives and, 45-47; nonprofit charities and,

224, 226; social entrepreneurs and, 22-25, 219-48; superbugs. 36-42. 47-

50: tackling, 16, 91-107. See also tisk

Wikinomics (Tapscott and Williams), 120

Wlklpedia. 83, 94, 107, 118, 121, 234

Williams, Anthony 0.. 120

Winner-Take-All Politicas (Hacker and Pierson) , 74

Wipro, 59, 210

Wired magazine, 95, 114

Wockhardt Hospital. Bangalore, 52

Wolfe, Nathan, 36, 38, 47-48, 49, 50

World Bank, 176, 180

World Economic Forum (WEF), 27, 143, 146, 258, 266n 27, 271n 143

world economy, 6, 8, I I , 12, 25, 26, 29, 73-74, 76, 101, 137, 177, 220: aging

population and, 6, 77-79, 91. 258, 279n 258; elites vs, middle class, 13-14,

87: global commons investing, 31-36: globalization and Googlizatlon of. 2,

6, 11 , 24-25, 58, 69, 144-46, 199; global financial crisis, 72, 77, 87-88,

136, 141. 143; global middle class, 12, 26, 51, 262; Great Disruption, 69-

70: Improved standard of living and, 26, 137-39, 265n 26: Inequity and

wealth gap, 70, 72-73, 143, 267n 72; new rules for technology, 86-87;

rising tide lifts all boats, 4, 167: turmoil in, 251-52; urbanization and, 12,

25-26, See also entrepreneurs: risk

World Health Organization (WHO), 41

World Trade Organization, 74, 143, 275n 194

Wyckoff, Andrew, 100

Xerox, 112, 187

PARC, 56, 112, 113, 199

X Prize Foundation, 102, 126, 253: Ansari X Prize, 126, 130; moon rover and,

206: oil spill clean up prize, 126: Progressive Automotive X Prize, 126,

198, 253

Yamada, Tachl, 133-34

Yo�k, P::lIII, S:t-S4

You Are Not a Gadget (Lanier) , 121

Yucca Mountain project, 157-58

Yudkowsky, Eliezer, 96

Yunus, Muhammad, 238, 239, 240, 241

Zara, 175

Zhou Shengxian, 30

Zongshen, 56

About the Author

VUAY V. VAITHEESWARAN is an award-winning correspondent

for The Economist. He joined the editorial staff in 1992 as its

London-based Latin America correspondent, and opened the

magazine's first regional bureau in Mexico City in 1994. From

1998 to 2006, he covered the politics, economics, business, and

technology of energy and the environment. From 2007 to 201 1

his portfolio encompassed innovation, global health,

pharmaceuticals, and biotechnology. He is currently the

magazine's China Business & Finance editor.

He is a life member at the Council on Foreign Relations, and

an advisor on sustainability issues to the World Economic Forum.

He teaches at NYU's Stern School of Business, and his

commentaries have appeared in such outlets as NPR, the Wall

Street joarnal, and the New York Times. On the topic of

innovation, he has addressed groups ranging from the US

National Governors' Association and the UN General Assembly

to the TED, AAAS, and Aspen Ideas conferences. He also serves

as chairman of the Economist's path-breaking series of

conferences and multimedia debates on innovation, the Ideas

Economy (www.ideas.economist.com).

His last book, Zoom, co-authored with lain Carson, was

named a Book of the Year by The Financial Times. His first

book, Power to the People, was reviewed by Scientific American

as �by far the most helpful, entertaining, up-to-date, and

accessible treatment of the energy-economy-environment

problematique available." Vijay is a graduate of the

Massachusetts Institute of Technology, where he was named a

Harry S. Truman Scholar by the U.S. Congress. He was born in

Madras, India, and grew up in Cheshire, Connecticut.

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